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13th April 2015

Pensions

Pension rule changes as of 6th April 2015

Since April 6th, the new "pension freedoms", originally announced in the Autumn Statement and the budget, have been in place. It's mostly good news for savers, but there are some drawbacks. We will summarise the most important changes below.

(1) Abolition of the “death tax” - the pensions “death tax” (the 55% tax on pensions handed down to family members) has been abolished. Further good news is that if you own a joint life, or guaranteed annuity, and you die before the age of 75, this too can now be passed on. If you die after 75, and your descendants want the whole pot as a lump sum, they will now pay 45% tax, instead of the previous 55%. However, the government is deliberating on whether to reduce this further to the individual's income tax rate.

Anyone who draws down income from an inherited pension pot will pay tax at their marginal rate.

(2) Freedom to take entire pension as a lump sum – from the age of 55, you are now entitled to take as much from your pension pot as you wish, subject to tax. Up to 25% can still be taken tax free. Income tax is payable on any amount you withdraw above that 25%. If that amount, added to the rest of your income, exceeds £42,386 (the higher tax rate for 2015/16), you will be taxed at 40% on the income above that level.

If your total income exceeds £100,000, your personal income allowance (£10,600 for 2015/16) is reduced. For 2015/16 tax year, the personal allowance is reduced to nil if income is £121,200 or more. This means that the effective tax rate in the band £100,000 - £121,200 is 60%.

(3) Reduction in pension limit – the amount you can hold in your pension has been reduced from £1.25m to £1m. You can technically hold more than this, but if you choose to do so, you will be taxed at 55% on any withdrawals.

Note, however, that Defined Benefit schemes are treated as having a notional capital value, calculated by multiplying the annual income by 20. This allows an annual income of up to £50,000, which could go on for more than 20 years.

(4) Ability to swap Defined Benefit pensions for Defined Contribution – those with Defined Benefit schemes, which promise a certain income, are now able to trade these in for a Defined Contribution scheme. This won't appeal to everyone because Defined Benefit schemes offer certain advantages not provided by their Defined Contribution counterparts (see point 3 above for an example). Anyone thinking of swapping should look into all the advantages and disadvantages before doing so.

(5) You are no longer required to buy an annuity - but you still can if you want to.

(6) Annuity and drawdown taxes – if you choose to buy an annuity (an income for life), or you take income drawdown (leaving your pension pot invested), you now only pay tax on the income. If your total income is below £10,600 in 2015/16 then you will not pay anything.

(7) Introduction of a new state pension rate. - from 6th April 2016 the rate is expected to increase from £113 a week to about £155, but the exact figure will not be known until towards the end of 2015. It should be noted that it will now be more difficult to qualify for the full state pension.

(8) Free advice – all retirees now have access to free guidance, through the government's Pension Wise service. Their number is 0300 123 1047, or you can visit their website at www.pensionwise.gov.uk

The advice they offer is strictly general guidance; they will not recommend specific pension policies or investments.

(9) Freedom to sell annuities for cash? - in the budget, George Obsorne announced that the government will carry out a consultation in order to make it possible to sell an annuity for cash. This freedom could be granted from April 2016.

Below are the most popular Elite Rated pension funds last year according to our sister company Chelsea Financial Services -

(1) First State Asia Pacific Leaders
(2) Marlborough Special Situations
(3) CF Woodford Equity Income
(4) AXA Framlington UK Select Opportunities
(5) Artemis Global Income


Sources:
BBC News website 02/04/2015
Chelsea Financial Services website, February 2015
Pension Wise website, April 2015


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