Pensions are changing! Are you ready for April 6th 2015?

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Flexible Access 

From April 2015 if you are aged 55 or over you will have total freedom over how you take an income or a lump sum from your pension. You can take the whole pension as cash with the first 25% tax-free, take smaller lump sums as you wish with 25% of each withdrawal tax free and the rest taxed as income, or take up to 25% tax-free and a regular taxable income from the rest.

Annual Allowances

Pension contributions are currently subject to a £40,000 annual allowance and specific contribution rules. However, if after April 2015 you make withdrawals from a defined contribution pension in addition to tax-free cash, contributions to defined contribution plans could be restricted to £10,000.

Individuals in existing capped drawdown from 6th April 2015
The £40,000 annual allowance is retained as long as the individual is in an existing 'capped' drawdown scheme on 6 April. They also keep the ability to carry forward unused contributions from the previous 3 tax years. The maximum carry forward limit is £180,000 in the 2015/2016 tax year.

Individuals going into drawdown after 6th April 2015
A £10,000 annual allowance for money purchase pension savings will apply to individuals who have accessed their pension savings flexibly from an Uncrystallised Fund Pension Lump Sum (UFPLS), a flexi-access drawdown fund or a flexible annuity. The £10,000 annual allowance will also apply to payments of a scheme pensions set up on or after 6 April 2015 from a scheme with less than 12 pensioner members. However, such individuals will retain an annual allowance for defined benefits pension savings of up to £40,000, depending on the value of new money purchase pension savings. The £10,000 annual allowance will not apply to an individual by virtue of their receiving a small pot lump sum. Unused annual allowance brought forward from earlier tax years will not be available to increase the £10,000 annual allowance for money purchase pension savings.

Death Tax

Currently, it is normally only possible to pass a pension on as a tax-free lump sum if you die before age 75 and you have not taken any tax-free cash or income. Otherwise, any lump sum paid from the fund is subject to a 55% tax charge. From April 2015 this tax charge will be abolished. The tax treatment of any defined contribution pension you pass on, which you do not use to purchase a lifetime annuity or scheme pension, will depend on whether you die before or after age 75.

If you die before age 75
Your beneficiaries can take the whole pension as a tax-free lump sum or take an income from it.

If you die after age 75
Your beneficiaries can either: take the whole pension as cash subject to 45% tax, take a regular income subject to tax at the beneficiaries marginal rate, or take smaller lump sums through income drawdown which will be treated as income and taxed at the beneficiaries marginal rate.

Death after buying an Annuity

If you buy an annuity, you can choose for the income to be paid to your spouse or partner after you die (a joint life annuity). You can also choose a guarantee period or value protection to ensure that should you die before the term ends it will continue to pay out to your spouse, partner or beneficiaries. Currently, these payments are subject to tax. In the Autumn Statement of 2014 the Chancellor announced they will be tax free if you die before age 75 and the annuity you have is a lifetime annuity (if you have a scheme pension, any guarantee period payments will be tax free but joint life or value protection payments will continue to be taxed.

Access to free impartial guidance

Everyone should have access to free impartial guidance to help them make sense of their options at retirement. This service will be provided by Citizens Advice Bureau and the Pensions Advisory Service and the Pension Wise website can be accessed at www.pensionwise.gov.uk. There will be no charge and your pension provider will be required to tell you about the impartial guidance.

Ability to transfer a defined benefit pension

Most people with a defined benefit, also known as a final salary, pension will also be able to take advantage of the new rules and make unlimited withdrawals. To do so, they will have to transfer to a defined contribution pension. But as you could lose very valuable benefits, you should seek appropriate independent advice first.



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Understanding the UK State Pension Reforms

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From April 2016 a new single-tier state pension system will come into effect in the UK which will be the biggest overhaul in recent history. This will replace the current system which is made up of the basic state pension (£113.10 a week for a single person in 2014/15) and the additional state pension (up to a maximum of £163 a week in 2013/14), also known as State Earnings Related Pension Scheme (Serps) or state second pension (S2P). The single-tier pension will be a flat-rate worth £144 a week in today's money. 

Who will benefit?

This will be good news for the self-employed, who do not currently qualify for the second state pension, for women who may have gaps in their national insurance records from caring for children (they will receive more state pension), and taxpayers in the long-term, with current government spending projections on pensions decreasing from 2040. Conversely, for others such as public sector workers in contracted out defined benefit, or final salary schemes, will see their national insurance contributions rise - effectively meaning a pay cut for them. It will also effect high earners who will no longer be able to accrue a state pension of over the basic rate, this is because the flat-rate pension will be capped regardless of length of contributions or earnings.

Qualifying for the new single-tier state pension

Under the changes, only those who reach state pension age (for men this is currently 65 and 60 for women) from April 2016 onwards (men born on or after April 6 1951 and women born on or after April 6 1953) will be eligible for the new single-tier pension, with those reaching state pension age before this date remaining on the old system. Additionally, in order to qualify for the new single-tier system you will need to have built up 35 years of national insurance contributions, which is 5 years more than the current 30 year requirement, or build up more National Insurance credits (claimed if your income is below a certain level). Those with less than the required amount of contributions will not be eligible to receive the single-tier state pension and will receive a smaller pension based on pro-rata contributions. Those who have a starting entitlement higher than the rate of the single tier from a combination of the old basic state pension and Serps will still receive the higher amount, while those who have contracted out of the state second pension will have a deduction taken from their new single-tier pension since their state pension entitlement will be delivered through a private scheme instead.

Marriage, divorce and bereavement

It should also be noted that there are changes to the way pensions are inherited or claimed which may effect your retirement planning. There is some protection in place for these situations but as they currently stand the rules for marriage, divorce and bereavement will end. Spouses and civil partners will not be able to claim a state pension based on a partner's national insurance contributions, widows and widowers will no longer be able to inherit a partner's pension and divorcees will not be allowed to substitute their ex-partners national insurance record for their own.

Boosting your pension

So, is there a way to boost your current state pension in preparation for the transition? The answer is yes, you can do this with the state pension top-up scheme. This allows those reaching the state pension age before April 2016 to increase their entitlement by £1 to £25 a week in return for a one-off payment, this voluntary National Insurance contribution is known as Class 3A and is open to men born on or before April 6 1951 and women born on or before April 6 1953. Another option is to delay claiming a state pension in order to boost it, however, it should be noted that if you were born on or after April 6 1951 (men) and on or after April 6 1953 (women) you will not be able to defer your state pension age in order to qualify for the new single-tier pension. If you do defer, the rate of increase for deferring a full year of the single tier system will fall from 10.4% to 5.8% and the option to receive a cash lump sum will not be available.

If you are in any doubt as to your state pension entitlement or if you would like to review your retirement provisions in general, we have extremely knowledgeable advisers who would be more than happy to review your circumstances and ensure that you are getting the most for your retirement. To read more about the 2016 state pension reforms you can visit the Gov.uk website for detailed information.

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