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Andrew Johnston explains how the temporary pension relaxations under the Finance Act 2014 – which close on 5 April 2015 – apply to soon-to-be retirees.
Looking back to December 2002, HM Treasury and the Inland Revenue (now HM Revenue & Customs) issued the consultation document Simplifying the taxation of pensions, increasing choice and flexibility for all.
Its aim was to allow people to plan effectively for retirement. It was felt that too many people found pension planning had become an incomprehensible maze. In particular, the complexities of the current tax rules had made pensions hard to understand, even for experts.
We are now seeing a large part of the “rule book” torn up and the introduction of “freedom of choice” designed to meet the needs of people in the 21st century. However, with this freedom comes temptation. We will have to monitor the new regime to assess whether these changes are a step too far.
The Finance Act 2014 confirmed that from April 2015, soon-to-be retirees will now have:
This article will not consider the full changes, but touches on the temporary changes to help those already “in” or “at” retirement ease towards these new freedoms, which may provide some extra planning opportunities. If applicable, advice should be sought before these options “close” on 5 April 2015.
Drawdown
From 26 March 2014 the following relaxations were introduced:
Using capped drawdown, now, allows individuals to take their lump sum and income now, and still keep the options open for 2015. After that date, new capped drawdown will no longer be available, which closes an option we discuss later.
Small pots
If you are over 60 and have accumulated a small pension pot, the following options are available:
These changes when combined can give immediate access to savings of up to £60,000 as a lump sum – it should be noted this may not be the most tax efficient method to access these smaller pension pots.
Protected lump sums above 25%
Individuals with Executive Pension Plans (EPPs) and Section 32 (Buy out/Transfer Plans) that may include entitlements to tax free cash in excess of 25% may need to review their plans for taking benefits.
It is likely many of these contracts will not offer the flexibility to take advantage of the new pension rules and would have needed to enact a transfer, resulting (in most cases) in the loss of the enhanced tax free cash limit – unless a transfer could be made under the “buddy transfer rules”.
An interim measure has been introduced to allow individuals looking to take their benefits soon to transfer to access the new pension freedom without losing any protected lump sum. However, certain conditions need to be met:
Pension contributions: new limits
There have been a number of concerns raised that the new flexibility and current contribution limits could be used to avoid employer and employee national insurance contributions by passing salary through a pension to then be drawn by the individual. Anti-avoidance rules have been introduced to reduce this risk, as follows:
As can be seen, if you are planning to access any pension funds in the near future and still wish to maintain the maximum annual allowance of £40,000 you may need to consider applying for capped drawdown before April 2015, to maintain the maximum contribution flexibility. This is just the tip of the iceberg on financial planning opportunities for pensions from 2015, but highlights that as with most of the new pension flexibility, advice is key to ensure better outcomes and that opportunities are not lost.
Its aim was to allow people to plan effectively for retirement. It was felt that too many people found pension planning had become an incomprehensible maze. In particular, the complexities of the current tax rules had made pensions hard to understand, even for experts.
We are now seeing a large part of the “rule book” torn up and the introduction of “freedom of choice” designed to meet the needs of people in the 21st century. However, with this freedom comes temptation. We will have to monitor the new regime to assess whether these changes are a step too far.
The Finance Act 2014 confirmed that from April 2015, soon-to-be retirees will now have:
This article will not consider the full changes, but touches on the temporary changes to help those already “in” or “at” retirement ease towards these new freedoms, which may provide some extra planning opportunities. If applicable, advice should be sought before these options “close” on 5 April 2015.
Drawdown
From 26 March 2014 the following relaxations were introduced:
Using capped drawdown, now, allows individuals to take their lump sum and income now, and still keep the options open for 2015. After that date, new capped drawdown will no longer be available, which closes an option we discuss later.
Small pots
If you are over 60 and have accumulated a small pension pot, the following options are available:
These changes when combined can give immediate access to savings of up to £60,000 as a lump sum – it should be noted this may not be the most tax efficient method to access these smaller pension pots.
Protected lump sums above 25%
Individuals with Executive Pension Plans (EPPs) and Section 32 (Buy out/Transfer Plans) that may include entitlements to tax free cash in excess of 25% may need to review their plans for taking benefits.
It is likely many of these contracts will not offer the flexibility to take advantage of the new pension rules and would have needed to enact a transfer, resulting (in most cases) in the loss of the enhanced tax free cash limit – unless a transfer could be made under the “buddy transfer rules”.
An interim measure has been introduced to allow individuals looking to take their benefits soon to transfer to access the new pension freedom without losing any protected lump sum. However, certain conditions need to be met:
Pension contributions: new limits
There have been a number of concerns raised that the new flexibility and current contribution limits could be used to avoid employer and employee national insurance contributions by passing salary through a pension to then be drawn by the individual. Anti-avoidance rules have been introduced to reduce this risk, as follows:
As can be seen, if you are planning to access any pension funds in the near future and still wish to maintain the maximum annual allowance of £40,000 you may need to consider applying for capped drawdown before April 2015, to maintain the maximum contribution flexibility. This is just the tip of the iceberg on financial planning opportunities for pensions from 2015, but highlights that as with most of the new pension flexibility, advice is key to ensure better outcomes and that opportunities are not lost.
Andrew Johnston explains how the temporary pension relaxations under the Finance Act 2014 – which close on 5 April 2015 – apply to soon-to-be retirees.
Looking back to December 2002, HM Treasury and the Inland Revenue (now HM Revenue & Customs) issued the consultation document Simplifying the taxation of pensions, increasing choice and flexibility for all.
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