Understanding the most important piece of pension legislation ever
Pensions are not normally a subject to get excited about, but following the chancellor’s announcements in his March 2014 budget regarding pension reforms I have to admit that I got very excited.
While the proposed reforms are subject to consultation over the summer, if approved, in one fell swoop the UK will have moved from having one of the least flexible pension regimes in the world to having one of the most flexible, and in my opinion this is the most important piece of pension legislation ever.
So what is likely to change?
The main points which affect investors with private pensions are as follows:
– Facility to take unlimited income from pensions subject to tax. There were limits previously which were determined by the Government Actuaries Department. The first 25 per cent remains tax free.
– The punitive 55 per cent tax charge on death in drawdown / post age 75 to be reviewed.
– The introduction of a right to financial guidance for consumers at retirement.
– A review of the tax rules for over 75s claiming pension tax relief.
– An increase in the minimum personal pension age from 55 to 57 with effect from 2028.
While there has been some comment, notably by Steve Webb the pensions minister, about people rushing out to spend their pension funds on expensive cars (he suggested a Lamborghini) the proposed changes have been well received with most people expected to use their retirement funds for the purpose they were originally intended, but with more flexibility. In reality purchasing a buy-to-let property instead of an expensive car looks more likely.
So what happens now?
Well the consultation process closed on June 11, 2014 and the Autumn Statement later in the year should complete the process with any changes being effective from April 2015. The proposed changes will undoubtedly have a profound impact on the pension landscape in the UK with one commentator describing the new rules as ‘a flexible government backed savings scheme with tax relief’.
However, the new rules will not be appropriate for everyone. Under these proposals your pension fund can, and will, run out so there will still be a market for annuities, particularly where people want the security of a guaranteed income for life.
Our key message would be keep your options open to make the most of the new rules coming in April 2015 and take professional advice.