Pensions unshackled
The approaching changes to pension
legislation will create both opportunity and possible confusion.
This year, the Chancellor has proposed some surprising, but very welcome, changes to the rules on how pension benefi ts can be accessed. The changes being lined up have been largely well-received, but those eligible to take advantage of the new rules may be confused by the number of choices available.
There are two big changes. The fi rst one relates to the way people can take benefi ts at retirement and means that people will be able to take the whole of their fund as one lump sum if they choose. The other change is to do with the way pension benefi ts are taxed on death. The two of these together have acted as a game changer in terms of overcoming some major reservations that have previously discouraged people from investing for their retirement through a pension rather than something else.
Andrew Stokes, Head of Pensions at St. James’s Place, explains how the changes will aff ect the way in which pension benefi ts can be taken.
What do the changes mean for an individual who, let’s say, has a pension fund of £100,000?
The changes enable everybody to take out whatever they like from their pension in one chunk. Whether or not they should is a diff erent matter. At the moment people can do this if their fund is very small – less than £30,000 – or if their fund is very large and they have a guaranteed pension in payment of £12,000 a year. The changes mean that people with a fund size of, say, £100,000 now have the same fl exibility. One thing we have to remember is that all of these fl exibilities
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don’t remove the need for people to be responsible. It’s why getting advice is more important than ever.
What are the tax implications if someone took the whole £100,000 in one year?
Let’s assume the individual has no other income to begin with and they’re going to take the £100,000 as a one-off lump sum (known as an ‘uncrystallised funds pension lump sum’). The fi rst £25,000 (i.e. 25% of the fund) is paid as a tax-free cash amount. The remaining £75,000 is taxed as income. Using the rates that apply from April 2015 this means:
First £10,500 Next £31,785
Remaining £32,715
Tax rate 0%
20% 40%
After deducting the tax, the individual receives £80,557. And that’s for them to live off for the rest of their life?
Precisely. Average life expectancy for a 65-year-old male is 83, and the most common age of death for men is 86 (source: ONS – November 2014), so if they’re taking their benefi ts in their mid-60s they might have to make that money last 20 years or more.
Do these changes signal the death of annuities?
No, annuities still very much have a role to play. They remain the only way to guarantee a pension income for life. For an awful lot of people that certainty is hugely important – more important perhaps than the fl exibility that will be off ered under the new rules. I often talk about an annuity essentially being your salary, the income you can rely on, and drawdown being a bonus. So no, I don’t see it as the death of annuities, but I do see them
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