Pension investors will be free to draw as much income as they like from their pension pot at age 55, with no restrictions and no requirement to buy an annuity under new rules coming into effect in April 2015.
As is the case at present, a quarter of the pension will be tax free, however, investors will be liable for income tax on the remaining three quarters. This means if you use the new freedoms to take all of your money out in one go you could face a hefty tax bill.
Free guidance at retirement
Everyone will be offered free impartial financial guidance at retirement. To remove any commercial bias, the guidance will be delivered by organisations such as the Pensions Advisory Service and the Money Advice Service, which have no financial products or services to sell. This guidance won’t replace the need for some people to pay for personal advice from qualified professional advisers, it should help investors to identify what their next steps should be and the kind of retirement income solutions that are likely to work best for them.
Preventing abuse of the new system
To prevent investors from exploiting these new freedoms to claim more than their fair share of pensions tax relief, the Treasury has introduced new anti-recycling rules. These new rules will mean if you withdraw more than the tax free lump sum of 25% of your pension pot, you’ll then be restricted to a lower limit on how much you’re allowed to subsequently pay into a pension. This will limit investors’ scope to pull large sums out of their pension and them immediately ‘recycle’ the money back in as a new contribution to gain the tax relief a second time. The new controls will also prevent employees over the age of 55 from ‘washing’ their salary through their pension, avoiding some income tax and National Insurance deductions in the process.
What next for pension investors?
We haven’t yet seen the precise regulations so the details above could yet be subject to tinkering at the margins. In the meantime, I think the Government should be applauded for taking such a bold and innovative step to reinvigorate investors’ interest in their retirement savings. Remember, one of the most tax efficient methods of saving for retirement is within a pension such as a SIPP (Self Invested Personal Pension).
Anyone building a pension will have pension freedom from next year. You might want to consider whether your pension provider is nimble and flexible enough to embrace the freedoms. You may also want to consider transferring to a provider that is. Before transferring any pension, you should make sure you will not lose valuable benefits or incur excessive penalties. Tax rules can change over time and any benefits depend on individual circumstances.
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About the author
Tom McPhail, Head of Pensions Research at Hargreaves Lansdown, monitors the constantly changing pensions landscape, the legislation, regulations and opportunities. He’s one of the foremost pensions commentators in the UK and has been involved in numerous government consultations on pension reform in recent years. Tom is also a Governor of the independent charity the Pensions Policy Institute.
You can find more information about tom using his Google profile here.
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