I THINK it is safe to say that no
one could have predicted some of
the most fundamental changes to
rules on how people can access
their pension in nearly a century.
Personally, I really welcome these
changes as they will offer increased
flexibility and wide-ranging
opportunities for investments
accumulated in pension funds.
I believe this may encourage
providers to be more
competitive
and
innovative
with their
products, as
well as
promoting
greater investment in retirement
planning.
There has been a great deal of
publicity about the abolition of the
compulsory purchase of annuities – in
fact, it has not been compulsory to
purchase one since April 2011! Of
course, as is the case now, just because
a particular course of action has
become available, it doesn’t mean it’s
suitable for everyone and for many
people the right choice for retirement
income may still be annuity purchase
(but I do hope to see more innovation
and product improvements).
Consultations
While some changes will take place
almost immediately, the remainder
won’t take effect until April 2015 and
a number of issues are still in the
consulting stage, so it is possible that
further amendments will be made
before they become law. However, the
following changes have taken effect
from 27th March.
The minimum income requirement
that allows people to enter flexible
drawdown is reducing from £20,000
to £12,000 per year. Flexible
drawdown is where there is no cap on
the amount that can be withdrawn in
any year from a pension fund.
No future tax relief on pension
contributions is available once an
individual enters flexible drawdown.
The amount of income you are
entitled to withdraw annually from
capped drawdown is increasing to
150% from 120% of the Government
Actuary Department limit – an
increase of 25% in income limits. The higher limit will apply to any pension
year beginning on or after 27th March
2014.
In addition, the pension triviality
limit is increasing from £18,000 to
£30,000. This means that where an
individual aged over 60 has no more
than £30,000 accumulated in total in
pension funds he or she can withdraw
it in full – 25% will be tax-free and
the balance will be taxed as income.
More radical reforms are planned
for April 2015, and these are subject
to consultation. Most notably, the
Government proposes to change the
tax rules to allow people to access
their money purchase pension savings
as they wish at retirement, subject to
their marginal rate of income tax and
the lifetime allowance.
Once consultation closes on 11th
June, the Government will publish the
responses and set out how it intends
to proceed. It recognises the widely
held view that, as the nature of
retirement changes, annuities are no
longer the right product for everyone.
It is believed that the annuities
market is currently not working in the
best interests of all consumers; it is
neither competitive nor innovative and
some consumers are getting a poor
deal.
The Government has also stated
that it will guarantee that individuals
approaching retirement will receive
free and impartial face-to-face
guidance to help them make the
choices that best suit their needs. A
new duty will be levied on pension
providers and trust-based pension
schemes to fund this “guidance
guarantee”.
Markets need to adjust
It is apparent that new products will
need to be developed and markets will
need to adjust. Standard Life has
already responded by announcing a
reduction in its minimum requirement
for drawdown funds to just £30,000.
Some commentators have
suggested this will mean people
“blow” their retirement funds and fall
back on the State, but we believe that
it is right to allow investors this
freedom and flexibility: if individuals
have been responsible enough to
accumulate savings in a pension fund,
they should be given the freedom to access them as they require.
Those who want the security of an annuity will still be able to purchase
one, whereas those who want greater
control and flexibility over their
finances will be able to have this.
The consultation also includes a
proposal to raise the age at which an
individual can take his or her private
pension savings under the tax rules
from 55 to 57 in 2028, which is when
the State pension age increases to 67.
The intention is that the minimum age will then increase as State pension age increases to remain 10 years below State pension
age, although the
consultation asks for
views on whether a five-
year differential might be
more appropriate.
I feel that, if this is
the case, there should
certainly be a removal of
the restriction on taking
tax-free cash after age 75
as the “window” to draw
this is narrowing too
much.
The Government is also exploring
whether those tax rules that prevent
individuals aged 75 and over from
claiming tax relief on their pension
contributions should be amended or
abolished. There has, at the time of
writing, been no clarity on whether
this may mean individuals may access
tax-free cash after age 75.
Range of new benefits
Pension policies were not the only
financial product that benefited from
a major overhaul in the recent budget.
Individual savings accounts (ISAs)
also were updated to feature a wide
range of new benefits.
From 1st July 2014 ISAs will be
restructured into a simpler product, the “New ISA” (NISA), and all
existing ISAs will become NISAs.
From July, the overall annual
subscription limit will be increased to
£15,000 for 2014-15. For the first
time, ISA savers will be able to
subscribe this full amount to a cash
NISA (currently only 50% of the
overall ISA limit can be saved in
cash).
As with current rules, investors
will be able to open one cash NISA
and one stocks and shares NISA each tax-year. However,
once open, the cash
or stocks and shares
NISA can be
transferred between
providers unlimited
times.
New rights
Under the NISA,
investors will also
have new rights to
transfer their
investments from a
stocks and shares to a
cash account
(currently only the opposite is possible).
Between 6th April and 1st July 2014, the total amount that can be
paid into a cash ISA will remain at the
previous limit set for the year at
£5,940 and the combined amount
paid into cash and stocks and shares
ISAs must not exceed £11,880.
From 1st July 2014, existing ISAs
will automatically become NISAs,
with a higher limit and more
flexibility. Thereafter, an investor will
be able to add further money to either
their cash or stocks and shares NISA,
up to the new £15,000 limit.
The amount that can be subscribed to
a Child Trust Fund or Junior ISA in
2014-2015 will also increase, to
£4,000.
