The welfare state is in retreat; in April 2015 we had the biggest shake up of private pensions since the 1980’s; these reforms are controversial but may revolutionise financial planning; in an age of austerity it is important to empower ourselves and take responsibility for our own futures.
‘Auto-enrolment’ has brought the reality of private pension provision to all employed members of our society and the new pension freedoms now counter many of the negative arguments levelled at private pensions in the past.
Most pension investors in defined contribution schemes now have total freedom over how they take income and lump sums from age 55.
They can take the whole fund as cash in one go; 25% tax free and the rest taxed as income at the individual’s marginal rate or they may take smaller lump sums, as and when they like with 25% of each withdrawal tax free and the rest taxed as income.
There are also changes to contribution rates, but perhaps the most significant change is to how the benefits of your pension in the event of your death are treated.
Previously, it was only possible to pass a pension on as a tax-free lump sum if you died before age 75 and you had not taken any tax-free cash or income; otherwise, any lump sum paid was subject to a 55% tax charge.
Now the tax treatment of any defined contribution pension you pass on will depend on your age when you die; if you die before age 75, your beneficiaries can usually take the whole pension fund as a tax-free lump sum or draw an income from it.
If you die after age 75, your beneficiaries may take the whole fund as cash in one go subject
to a 45% tax charge but from April 2016 this tax will be at your beneficiaries’ marginal income tax rate with the option to take a regular income (thus potentially reducing this rate).
If you buy an annuity, you can choose for the income to be paid to your partner after you die, these payments used to be subject to tax but are now free of UK income tax if you die before age 75.
Furthermore a joint-life annuity can be paid to anyone after you die and on their subsequent death any value protection or remaining guarantee period can be paid to anyone.
These changes primarily affect defined contribution schemes but there are also implications for members of final salary schemes who can now take advantage of the new rules by transferring the cash value of their pensions to a defined contribution scheme.
If you would like to discuss any aspect of this article then please feel free to contact Ellisons Financial Planning for a no obligation chat or face to face consultation.
Ellisons FP is an appointed representative of Matthew Douglas Ltd which is authorised and regulated by the Financial Conduct Authority