2015 Pension Changes

Radical Changes to Pensions in 2015

On 6th April 2015 the most radical changes to pensions for almost a century took effect. Here are some of the basic facts and how they might affect you:

Retirement PlanningFLEXIBLE ACCESS TO PENSIONS FROM AGE 55

What has changed?

Most pension investors aged at least 55 now have total freedom over how they take an income or a lump sum from their pension. They can choose to:

  • Take the whole fund as cash in one go – 25% tax free and the rest taxed as income
  • Take smaller lump sums, as and when they like with 25% of each withdrawal tax free and the rest taxed as income
  • Take up to 25% tax free and a regular taxable income from the rest (via drawdown – where they draw directly from the pension fund, which remains invested – or via an annuity – where they receive a secure income for life).

Any withdrawals in excess of the tax free amount will be taxed as income at your marginal rate. So, if you are a basic rate (20%) tax payer, any income you draw from your pension will be added to any other income you receive (eg your salary) and this could push you into the higher (40%) or even top rate (45%) income tax bracket.

It should also be possible to take the tax free cash straightaway and the taxable income via drawdown at a later date.

Who is affected?

Anybody with a defined contribution pension – eg individual or group personal or stakeholder pensions, Self Invested Personal Pensions (SIPPs), some Additional Voluntary Contribution (AVC) schemes, etc – could benefit. Investors aged 55 or over should be able to take advantage of the increased flexibility now.

Investment FundNEW RESTRICTIONS ON HOW MUCH YOU CAN CONTRIBUTE TO PRIVATE
PENSIONS AFTER YOU MAKE WITHDRAWALS

What has changed?

Pension contributions are subject to a £40,000 allowance for most people and specific contribution rules. A new £10,000 allowance has been introduced for people who have flexibly accessed a pension.

When you flexibly access benefits you must, within 91 days, inform any of your pension providers to which contributions are subsequently paid or face a £300 fine. The pension provider with whom you flexibly access benefits should usually inform you if this applies.

Who is affected?

Anybody who has flexibly accessed a pension since 6 April 2015 might be affected. Flexibly accessing a pension includes:

  • Taking an uncrystallised funds pension lump sum (UFPLS) or a standalone lump sum
  • Having flexible drawdown before 6 April 2015 (previously you were unable to make contributions, but now you can)
  • Taking an income payment from drawdown set up or converted to flexible drawdown after 5 April 2015
  • Exceeding income limits from drawdown set up before 6 April 2015
  • Taking an income payment from a scheme pension with 12 or fewer members or from a flexible annuity.

Flexibly accessing a pension does not include:

  • Taking tax free cash and no income
  • Taking a pension as a small pot due to being worth less than £10,000
  • Taking an income from capped drawdown set up before 6 April 2015 which remains within capped drawdown limits
  • Taking a pension as an annuity or scheme pension other than as described above

This £10,000 limit applies to contributions you and your employer make to money purchase pensions ( eg personal pensions). It does not apply to any defined benefit pension (eg final salary) you are building up.

55% PENSION ‘DEATH TAX’ ABOLISHED

What has changed?

Previously, it was normally only possible to pass a pension on as tax free lump sum if you died before age 75 and you had not taken any tax free cash or income. Otherwise any lump sum paid from the fund was subject to a 55% tax charge.

This tax charge was abolished on 6 April 2015. The tax treatment of any defined contribution pension you pass on, which you do not use to purchase a lifetime annuity or scheme pension, will depend on your age when you die. If you die before age 75, your beneficiaries can usually take the whole pension fund as tax free sum or draw an income from it, also free of UK Income tax, either by choosing to buy an annuity or by using drawdown.

If you die after age 75, your beneficiaries have 3 options:

  • Take the whole fund as cash in one go; the pension fund will be subject to 45% tax. However, in the July 2015 Budget it was confirmed this will be taxed as your beneficiary’s or beneficiaries’ income for payments made after 5 April 2016
  • Take a regular income through an annuity or drawdown; the payments will be taxed as your beneficiary’s or beneficiaries’ income.
  • Take periodical lump sums through drawdown; the lump-sum payments will be taxed as your beneficiary’s or beneficiaries’ income.

Who is affected?

Anybody who has a defined contribution pension – eg individual or group personal or stakeholder pensions, Self Invested Personal Pensions, Additional Voluntary Contribution schemes etc is affected.

RETIREMENT AGES TO INCREASE

What is changing?

The government has stated that it intends to increase the earliest age at which you can normally draw your pension, currently 55, to 57 from 2028 (and then increase it in line with the rise in the State Pension age). This will not apply to Public Sector Pension Schemes for Firefighters, Police and Armed Forces.

CONTRIBUTION ALLOWANCE INCREASE FOR 2015/2016

What has changed?

Contribution AllowancesA £40,000 annual allowance usually applies to total pension contributions in a tax year. A new £40,000 allowance has effectively been introduced for contributions made from 9 July 2015 to 5 April 2016.

Who is affected?

Investors who made contributions between 6 April 2015 and 8 July 2015 may now be able to invest more this tax year than they originally anticipated.

CONTRIBUTION RESTRICTIONS FOR HIGH EARNERS FROM 2016/2017

What is changing?

The July 2015 Budget included plans to limit how much high earners can pay into a pension without facing a tax charge. If the change goes ahead, it will apply to contributions made from 6 April 2016. The £40,000 annual allowance for pension contributions will be tapered down to as little as £10,000.

Who is affected?

Anyone with taxable income more than £150,000 in 2016/2017 is likely to be affected, although those with lower incomes could also be caught. The government has also announced a review into all pension tax benefits which could lead to more fundamental changes.

Disclaimer: This article is provided for general information and does NOT constitute financial advice or a recommended course of action. Please consult your financial advisor before taking further action. Chris Rowley Financial Services is authorised and regulated by the Financial Conduct Authority, FCA Register Number 458775.