THE BUDGET 2014
When George Osborne stood up and said he had good news for savers in his budget he wasn’t kidding! Pensions have been appearing on the front pages of all the national newspapers – and with changes to ISA limits and the starting rate of income tax, it is a huge boost to long term savings. The changes announced on Wednesday 19th March have created plenty of interest from many customers.
Pension changes from 6 April 2015
The radical pension proposals for 2015 reflect the government’s vision for a more flexible regime giving people more choice, control and responsibility over how they access their pension savings. But nothing is set in stone yet, and as always, the devil will be in the detail of the forthcoming consultations.
Will it really be possible to take unlimited income from defined contribution (DC) schemes after 6 April 2015?
Defined Contribution schemes are those pension plans where the CONTRIBUTIONS were known, but the BENEFITS available depended on the performance of the plan.
From 6 April 2015, the government intends to remove all retirement income limits for DC pensions. Effectively, everyone retiring with a DC pension pot will have access to flexible drawdown – without having to satisfy any ‘minimum income requirement’ or give up on future pension saving. This gives much more scope for innovative & tax efficient financial planning. There will, however, be circumstances where the new flexibility isn’t available:
- Existing annuities or scheme pensions: Those who have locked into a lifetime income using annuities, or scheme pensions, can’t undo them. This means many existing pensioners won’t have access to the new flexible income options.
- Defined benefit (DB) pensions: The new income flexibility won’t be available for DB pensions. These are typically schemes that are run for government employees such as those working in education or NHS. Such schemes have exceptional guarantees of future income, usually index-linked.
- Scheme/ product restrictions: There’s no obligation for every DC pension scheme or provider to offer the new flexibility. Some pension schemes may not have systems in place, or the scheme rules may not allow the new flexible income withdrawal. It may therefore be necessary to switch the fund to a pension scheme that is able to facilitate this.
27 March 2014 pension changes
The government is making some temporary changes to give pension savers a bit more flexibility until the 2015 changes come into force. While these changes are not subject to consultation some of the fine detail will only be known once the Finance Bill is published on 27th March.
When can drawdown users access the temporary changes?
For those that are in an existing income drawdown arrangement, the new, higher income limit will apply from the start of their next drawdown year after 26th March 2014. This is the anniversary date of when income drawdown was originally started, so some drawdown users won’t feel the benefit of the increased limit until March 2015. This does seem a little inconsistent with the government’s stated intentions so don’t rule out further interim changes. Anyone starting income drawdown under an arrangement for the first time after 26th March will have immediate access to the higher limit. In simple terms this limit will be approximately equal to 150% of the annual annuity that the customer would qualify for.
Is it possible for those with pensions worth more than £30,000 to get a lump sum using the new triviality relaxations?
Provided that benefits are taken in the correct order, and are structured in the right way, it will be possible to get lump sums of much more than £30,000 under the new triviality rules. But they still can’t be taken before age 60. This comes by combining the new ‘stranded pot’ and ‘trivial’ lump sum rules. A stranded pot is a small pension pot where the limit on drawing the whole as a lump sum was £2000, and trivial is the term used for one or a number of pension pots that totaled no more than £18,000. The new rules are £10,000 & £30,000 respectively and it may be possible to access up the £60,000 immediately:
Can those who have just bought annuities rethink their decision following the Budget announcement?
Some people may want to rethink their decision in light of the radical changes proposed in the Budget. But, for many, the reasons for their original decision will remain valid. The new flexible income options won’t be right for everyone. The usual cancellation rights apply to recent annuity purchases. Many annuity providers have extended the cancellation period following the Budget. Of course, annuity cancellation doesn’t give an automatic right to reinstatement as a pre-retirement member. Some schemes, particularly occupational schemes, aren’t able to do this. So cancelling with one provider may simply trigger an obligation to buy a replacement annuity with another – and there’s no guarantee that the same terms will be available on the new purchase. Customers must beware.
NISA
If contributions have been made before 30 June 2014 is it possible to pay a further £15,000 after 1 July?
Unfortunately this won’t be the case. Any contributions made before 30 June 2014 will count towards the new £15,000. So someone paying the maximum £11,880 before 30 June 2014 will be able to make a further subscription of up to £3,120 after 1 July.
Will it be possible to contribute to different NISAs in the same tax year once the stocks and shares and cash definitions have merged?
Yes it will be possible to subscribe to a Cash NISA and a Stocks & Shares NISA in the same year, with separate providers, splitting the overall £15,000 allowance between the two in any proportion. The proviso on this will be the logistical ability of providers to facilitate such arrangements.