How to benefit from the new pension drawdown rules
Mark Brownridge of Mazars answers your questions on the new pension drawdown rules.
I’m already in drawdown, what do the changes mean for me?
If you are already in drawdown, the maximum yearly income you can receive, potentially increases from 120 per cent of Government Actuary’s Department equivalent annuity (known as “GAD”) to 150 per cent. However, you probably won’t benefit immediately as the change only takes effect from the date of your next anniversary review. For example, if your anniversary date is March 1st 2014, you won’t be able to change to the new 150 per cent limit until March 1st 2015. It will also depend on whether your drawdown provider has the systems in place to facilitate the change. From 6th April 2015, you will be free to access your drawdown fund however you want.
I’m retiring soon and am considering drawdown. What do I need to know?
For anyone going into drawdown for the first time, the calculation of their maximum drawdown income will be based on 150 per cent of GAD immediately.
From 6th April 2015, the Government has announced that it plans to scrap the maximum income. From that date, all income limits will be removed.
So, I can take my whole pension fund from 6th April 2015?
Yes. Whilst tempting to take the whole of your pension fund as a lump sum, consider the tax implications. Whilst the first 25 per cent of the lump sum is tax free, the remaining 75 per cent will be added to your existing income and taxed at your marginal rate of income tax. This could have the effect of pushing you into a higher rate band, meaning you pay more tax than you expected.
Drawdown will continue to only be suitable for those with larger pension pots (generally around £100,000) and for those people who wish to keep their pension funds invested.
Retirement still seems a long way of for me. What do the new changes mean for me?
The new pension rules will provide you with greater freedom and choice but also with new responsibilities. Whilst the biggest single reason for not contributing to a pension, i.e. that your pension pot is locked away, has been removed, the natural temptation will be to dip into them too deeply, too soon – just because you can. Keep in mind that the fundamental principles of planning for life after work remain the same i.e.
- Get saving: You are a long time retired. You’ll need more money in retirement than you think.
- Consider income needs: Income can be taken from a number of sources. You will need to budget to make it last or you risk blowing it all too soon.
- Investment risk: Consider whether you are prepared to risk losing some money from your investments in the hope of gaining higher returns or whether any losses would be completely unacceptable. Your answer will drive your long term investment strategy.
- Don’t forget tax: The tax framework isn’t changing. Using the most appropriate savings product (pension, ISA etc.) for you and your circumstances at the time, will give you greater returns and tax-efficient income. Don’t misuse the new flexibility and end up paying tax unnecessarily.
- Pass your pension on: The new rules announced on 29th September 2014 mean pensions become must have savings plans. From April 2015, you will be able to pass on your unused defined contribution pension to any nominated beneficiary when they die, rather than paying the 55 per cent tax charge