Springfords LLP News

To receive our quarterly e-newsletter filled with the kind of news you can use, register here.

Food For Thought - The New Pension Rules

23 January 2015

The 2014 Budget had plenty to whet the appetite, including some of the biggest and most radical shake-ups to the UK pensions regime in a long time.

As well as making access to Defined Contribution (DC) pension funds (including personal pensions and SIPPs)  easier and more flexible, significant changes were announced to the taxation of DC pension withdrawals and to the tax treatment of pension funds on and following death. The rules for Defined Benefit (e.g. final salary) schemes remain largely unchanged, and aren’t covered further in this newsletter.

The majority of the new rules will apply from April 2015, but unfortunately, flexibility doesn’t always mean simplicity.  Many elements of the new rules are complex, and specific advice will be essential. Broadly, however, some of the highlights of the new regime are as follows;

  • the current limits on the amounts that can be withdrawn from a pension fund will be removed for those over 55. Withdrawals will be taxed as income, attracting income tax at your marginal rate. In other words, your pension income will be added to your other income and, depending on the total, taxed at rates of up to 45%. This clearly presents opportunities for tax planning, if it can be withdrawn in stages to achieve an overall lower rate of tax, or perhaps taken as a larger payment in a year where other tax reliefs may be available.
  • as at present, 25% of a fund can generally be withdrawn tax-free.
  • the potential 55% charge on death has been removed (hurrah!).
  • if you die before age 75, whether currently in pension drawdown or before you’ve started to draw on your pension, your pension fund will pass to your beneficiaries free of tax – they will be able to draw as either lump sums or regular pension payments totally tax free  - a significant inheritance tax planning opportunity!
  • payments from certain joint life and guaranteed annuities will be tax-free when paid to a beneficiary, if the original policyholder dies before age 75. This will only apply where the beneficiary hasn’t received any annuity payments prior to April 2015, so existing annuity payments won’t be affected.
  • the beneficiaries of joint life annuities will no longer be restricted to spouses, civil partners and dependants, but can be passed to any beneficiary on death. Grandchildren perhaps?
  • if you die after age 75, whether or not in drawdown, your beneficiaries will be able to draw a regular income from your remaining pension fund and pay income tax at their marginal rate. Should they take a lump sum withdrawal instead, tax will be payable at 45% but from April 2016, this would be at their marginal rate. Not as attractive as the regime applying where you die before age 75 - but we don’t want you to do that! And the position is still a significant improvement over the much maligned 55% tax hit that currently exists.

It has been announced that everyone affected by the changes will be able to access free and impartial guidance, via the internet, over the phone, or at a Citizens Advice Bureau.  While this general guidance could be useful, we recommend that advice on your pension planning should always involve your own financial adviser, and should take into account all other aspects of your financial position, to ensure that you have sufficient income in retirement, as well as achieving maximum tax efficiency both now and in the future.

For some, the new rules really could mean having two bites at the cherry - a 40% taxpayer making a £100k gross contribution to a pension scheme will obtain tax relief of £40k, and if they then pass their £100k fund (plus tax free growth) to their beneficiaries (as opposed to other personally owned assets which would attract IHT on death), they could save in excess of £40k in IHT.

If you’re hungry for more, your Tax Adviser at Springfords will be happy to liaise with your financial adviser to provide a joined-up analysis of your pension position in preparation for the new rules. If you don’t currently have a financial adviser, we’d be happy to make some suggestions.  Contact us on 0131 440 5000 or if you'd like us to help.

This is a general guide which is intended to give background information and is not a substitute for taking specific advice based on your particular circumstances.

Contact Us
  terms & privacy
Part of Baldwins