pensions 27 The freedom to be tempted


If you were the chancellor for a day, how would you stimulate the economy? Perhaps you could persuade people to spend money in the real economy and pay some tax while they are doing it. Sounds like a tough assignment, but you could argue that George Osborne has had a pretty good stab at it


The 2014 Budget signalled a step change in pensions legislation, which aims to provide significant freedoms to many savers. A raft of proposals will be under consultation over the coming months to shift responsibility from the state to the over 55s, who are now deemed to be worldly-wise enough to make their own decisions about their retirement incomes.


A number of headlines have been grabbed by this unexpected announcement. Some focused on whether pensions savers would be enticed to use their pension capital to buy a luxury sports car; others predicted the death of annuities.


Many Defined Contribution schemes already allow full access to the pension pot, subject to the Minimum Income Requirement (MIR), through Flexible Drawdown. The MIR was designed to be at a level which provided a basic standard of living, and was set at £20,000 initially. This has now been reduced to £12,000 and is due to be abolished entirely in 2015. If the legislation is approved, all pension money will be available as a lump sum, rather than having to use it to provide an income for life.


For many this is excellent news, and some pension schemes will be emptied to avoid further legislation and complexity.


Some may choose to enjoy their hard- earned savings on all the wonderful things they promised themselves in the early stages of a happy retirement.


There is, of course, a catch. Although the money from a pension looks like


capital, 75% of it is treated as income. As a consequence, all withdrawals after the 25% tax free entitlement is exhausted, are taxable at the saver’s highest marginal rate of income tax. That could be as high as 45%.


Some may choose to enjoy their hard-earned savings on all the wonderful things they promised themselves in the early stages of a happy retirement


Then, should a saver be unlucky enough to die before spending their newly-withdrawn pension money, it could form part of their estate for Inheritance Tax: another 40% liability.


I can resist anything


except temptation Oscar Wilde


Tax, although important, is only one of the issues that the proposed changes present. Potentially more important for retirees who are unlikely to want to work again, is maintaining the standard of living that a pension can provide. Historically, the express purpose of a pension was to provide an income for life. The safeguards, complexities and even frustrations of pensions legislation were largely set out to ring-fence a standard of living throughout old age.


income, and another to use flexibly as needs change.


For most people, however, it may still be possible to enjoy the best of both worlds. By successfully resisting the urge to spend heavily in the first few years of retirement, a pension can be used as a vehicle to provide both capital and income over the long term. Once you have decided your own personal ’minimum income


required’, pension capital can be assigned to provide an income stream and/or lump sums. For those who are


more risk averse, an annuity may still form part of the answer, while continued pension investment and withdrawal may add further potential growth and flexibility.


If pension funds


are exhausted in the first few years, then other resources must be called upon if the newly- revised Basic State Pension is not enough.


As it stands, those savers with Final Salary (or Defined Benefit) pensions schemes are immune from the changes, although a Consultation Paper has been issued on the subject. Although it may be comforting to know that the Final Salary pension was designed to last a lifetime, it is likely to feel galling, as they watch their potentially profligate friends buy the apocryphal Lamborghinis and luxury holidays now while they are constrained by their relatively modest scheme pensions.


If you are lucky enough to have both Final Salary and Defined Contribution pensions, then you may be able to have your cake and eat it: one element to provide a steady


THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – JULY/AUGUST 2014 www.businessmag.co.uk


To navigate the complexities of legislation and tax in order to make the most of your retirement savings, we would always recommend taking advice from a suitably-qualified independent professional.


If Oscar Wilde’s aphorism above strikes a chord with you, then the secret might be to know when to be tempted, and by how much.


Details: Charles Cavendish 023-8038-1135 charles.g.cavendish@uk.gt.com www.grant-thornton.co.uk


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