The Budget and Retirement Planning
The Budget has announced major changes to those planning for retirement. Many of the changes require updated legislation and consequently they will not come into place until April 2015. Currently most people have to purchase an annuity at retirement – this typically turns your pension pot into an income for life. This is a form of insurance that divides the pension into small monthly payments that last until death, or may pay out to your dependant(s) if you die. From April 2015 you will have the freedom to cash in as much or as little of your pension pot as you want, removing the need to buy an annuity. You will still be able to take 25% of the pension pot as a tax-free lump sum. With the remainder you will have three options: • Withdraw the remaining money as cash, subject to income tax at your highest rate • Purchase an annuity • Leave the fund invested and make unlimited withdrawals as and when required (again subject to income tax) If you are approaching retirement before April 2015, contact Gaeia for advice. You may wish to delay making a final decision until after the changes take place. Triviality Rules This is a rule for those with smaller pension pots which allows for a ‘trivial commutation’ of pots of £18,000 or less, the limit for which is increasing to £30,000 immediately on 27 March 2014. If your pension savings (ignoring your state pension) in their entirety are worth no more than £30,000 you may be able to take all your pension pots as a lump sum. This type of lump sum is called a 'trivial' lump sum. You are liable to income tax on 75% of any lump sum taken which exceeds 25% of the total pot. In addition, small stand-alone pension pots of up to £10,000 can be taken as a lump sum - a significant increase from the current limit of £2,000. The number of small personal pension pots that can be taken as a lump sum also increases from two to three. Drawdown Rules The maximum yearly income allowed (under Capped Drawdown rules) is increasing from 26 March 2014. In addition, from 26 March 2014 it will be possible for more people to take out Flexible Income Drawdown arrangements ~ where unlimited income can be drawn down ~ as the ‘minimum income requirement', ie income from other sources, will be cut from £20,000 per annum to £12,000 per annum. The 55% Drawdown death benefits charge is set to be cut from April 2015 and the charge more closely aligned to income tax charges on Drawdown.