My Pension - my choice!
Following the chancellor’s budget in March 2014, George Osbourne shook up the Pension world when he made the surprise ruling that it was no longer necessary to purchase an annuity with their pension funds. Instead they could elect to take the full pension pot as cash when they finish work. The first 25% would be tax free, and the rest will be taxed as income.
These changes come into effect from the 6th April 2015, and allows an element of freedom that retirement savers have not had before. Pension freedom is imminent.
We asked Steven Frost Dip PFS Director of Finsbury Group to give his thoughts on how the forthcoming Pension changes will impact your pension in UK, and internationally?
The immediate impact will be substantially greater flexibility! For years there has been a major attraction in pension investment arising from the significant tax relief available for personal contributions. For example a £1000 personal pension contribution attracts a £1250 Inland Revenue rebate and, if you are a higher rate taxpayer a further amount can be claimed back through your tax return. If you have years, then the cumulative growth on this initial kickstart can be massive. However, as you reach retirement, say age 60, the value of this can be eroded in part by the tax payable on income drawn from pensions and also by the historic restrictions in accessing your fund, which have limited the amount you can take from your plan. In later years, therefore, this can often lead ISA investment to be equally attractive (virtually tax free growth, no tax on income drawn and no restrictions on accessing the fund)
Changes now mean that essentially you can benefit from the immediate tax relief, from virtually tax free growth and with significantly decreased restrictions on accessing the fund. There are also significantly reduced tax liabilities on death of the plan holder which mean that the incentive to reduce pension values in later life will be reduced.
The impact on our clients, means that, not only can I plan to use the fund for income but I can now plan to “spend” it if I wish.
Although for some people this may mean a new Maserati, for most, as above, it means greater flexibility. From the financial planning standpoint it means greater emphasis on “total retirement provision” rather than “pension”, and brings greater responsibility to ensure that, if pension is drawn down, the fund is replenished through realistic growth assumptions. It is also important to have a realistic long term plan for income taking account of all assets available, and guidance on the most tax-efficient ways of providing for your income needs.
Should you need any advice on you pension, or indeed feel that it is time to get a Financial Health check then please get in touch. We can then put you in touch with one of our affiliated advisors for a non-obligation consultation.
