Further reform makes the pensions picture a little clearer

Image of the Chancellor's Red Briefcase


Julie Hutchison

21st July 2014 at 12:16pm

Today, the Government has published more details on the new rules for pensions, which will apply from April 2015. This follows on from the initial announcement in the March Budget. This update gives a clearer picture in six areas and what it means for you.

Getting information about your options at retirement

Free and impartial guidance will be made available from independent organisations. The Pensions Advisory Service and The Money Advice Service are two of the partners who will be involved in this. How you get that guidance involves choices for you – face-to-face, over the phone or via the internet.

We welcome this step which will provide people with information at a critical time. And we’ll continue to communicate with our customers so they have personalised information as they plan for their future.

Freedom to transfer your pension

We’re delighted that people won’t face a ban on certain pension transfers. If you’re in a private sector defined benefit scheme (ie. a company pension which will pay an income linked to your years of service and salary), you’ll still have the choice to transfer it to a more flexible kind of pension, if you wish. That choice applies before you start taking the pension.

The option to transfer is also available for people who are in public sector schemes which are ‘funded’ (eg. the Local Government Pension Scheme and Universities Superannuation Scheme).

There’s an important safeguard here – before you go ahead with this kind of transfer, you’ll need toFree and impartial guidance will be made available from independent organisations. The Pensions Advisory Service and The Money Advice Service are two of the partners who will be involved in this. take advice from a professional financial adviser who is independent from the pension scheme and authorised by the regulator. There’s a lot to weigh-up when considering whether to transfer your guaranteed pension.

As the Government said today, “for the majority of people, but not all, it will remain in their best interest to stay in their defined benefit scheme”.

Annual allowance of £10,000 once you’re taking a flexible income

You might have seen some stories in the press about the potential for abuse with the rules announced in the Budget. There were concerns about a possible tax loophole which could cost the Government an estimated £24 billion.

To limit the potential for abuse, today’s new rules for April 2015 will apply to people who are in a “give and take” situation. In other words, people who are still paying into a private or workplace pension and who are also taking a flexible income from a pension too (an annuity or State pension doesn’t count here).

These rules don’t apply if you’ve just taken your tax free cash – they apply when you start to take a flexible income beyond that. In this situation, the amount you’ll be able to pay in to your pension drops from £40,000 a year to £10,000. We welcome this proportionate response and estimate it will only impact a tiny percentage of people who are in this “give and take” situation.

55% pension death benefit tax charge

Today’s announcement makes clear that the Government intends to reduce this tax rate, which is great news. We’ll need to wait until the Autumn Statement later in 2014 to find out the exact figure, and meantime we’ll continue to make representations on this tax issue.

As I wrote about in my earlier blog, we had been hoping for this tax charge to be reduced. It applies when a pension lump sum is passed on to your loved ones, if you die aged 75 or older, or where you’ve started to take an income from your pension. It’s sensible for the Government to give themselves a few more months to reflect on the tax position here, to make sure there are no unintended consequences with the new tax rate chosen.

Age 55 becomes age 57, in 2028

The Government will increase the minimum age at which people can access their private pension under the new tax rules, from age 55 to 57 in 2028. This affects those born from March 1973 onwards, and means people will need to wait until their 57th rather than 55th birthday to take money out of their private pension.

This change is also being extended to public sector schemes, except the Police, Fire Service and Armed Forces pension schemes, where the qualifying age isn’t changing.

25% tax free cash continues

Finally, it’s great news that the right to take 25% tax free cash hasn’t been affected – there had been some speculation earlier this year that it would be impacted. It’s a pension benefit which we know customers really like and today’s announcement preserves it.

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This blog and any responses to comments are not financial advice.