03 Jul 2014

Queen’s Speech Signals Pensions Shake Up

Queen’s Speech Signals Pensions Shake Up

Peter Mutch, Aberdein Considine Corporate Benefits Director, comments on the Queen’s Speech and what that means for pensions.

Peter Mutch, Corporate Benefits Director, comments on the Queen’s Speech and what that means for pensions.

The Queen’s Speech brought great news for pension savers who have been given more control over the income they take from their pension pot.

Radical changes announced in the annual speech could herald the biggest shake-up to UK Pensions ever and it could happen as soon as 2015.

Flexibility

These welcome proposals would give most pension savers more freedom, choice and flexibility than ever before over how they access their pension savings. The highlights are:
  • If the changes go ahead, anyone of pension age would be able to draw as much (or as little) from their Defined Contribution pension pot as they choose at any time; and
  • 25% would still be tax free. The balance would be taxed as income in the year it's taken.

The detail isn't set in stone but this signals a clear political desire to give savers more control and responsibility over their savings. It could represent ‘pension utopia’ but only with advice to solve an increasingly complicated retirement equation.

These proposals will be consulted on this year but in recognising the need for flexibility there is a boost for drawdown users almost immediately.

The Chancellor has announced two welcome changes to income drawdown rules from 27 March:
  • Capped income drawdown limit up 25%: The maximum yearly income allowed under the pension capped drawdown rules will increase by 25%, from 120% to 150% of the Government Actuaries Department basis amount, for income years starting after 26 March 2014; and
  • Flexible income drawdown minimum income requirement cut to £12k: The yearly secured income needed to meet the ‘minimum income requirement' to access flexible drawdown will be cut from £20,000 to £12,000 for those applying to start flexible drawdown after 26 March.

Taken together, these changes give pension drawdown users even more flexibility to dial income up or down to adapt to changing circumstances.

Pension triviality limits increased

The Chancellor has announced welcome changes to the pension triviality rules from 27 March 2014:
  • Triviality limit up to £30k: Individuals over age 60, with total pension savings of £30,000, or less can take it all as a trivial commutation lump sum - the current limit is just £18,000; and
  • Stranded pot rules relaxed: Small stranded pension pots of up to £10,000 can be taken as a lump sum - a significant increase from the current £2,000.

The number of small stranded personal pension pots that can be taken as a lump sum has also increased from two to three.

These changes improve choice for more consumers who may otherwise have been forced to receive very small regular pensions for life, with limited ability to shop around for the best annuity. In both cases, up to 25% of the lump sum can be paid tax-free with the balance taxed as income.

55% Drawdown death benefits charge set to be cut

It's also good news for drawdown users with the announcement of a consultation on the 55% tax charge on drawdown lump sum death benefits.

With much greater freedom proposed on taking pension benefits, there are plans to cut the rate of tax payable on drawdown death benefits from April 2015 to make it more closely aligned to income tax charges on drawdown.

Having a rate of tax on death which is greater than the income tax on withdrawing income could see the tax tail wagging the retirement income dog. The Government have recognised the need to have a tax system where pension savers are not penalised by only taking what they need from their pension fund.

This should see the ability to pass on pension death benefits to loved ones given a further boost and make the use of bypass trusts even more appealing.

Peter Mutch,  Corporate Benefits Director



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