Recent changes to personal pensions and self-invested personal pensions (SIPPs) on retirement have received significant coverage in the media. Beyond the headline-grabbing talk of buying a Lamborghini, what pension flexibility have the changes introduced?
The new flexibility comes in two phases:
- Phase 1, an increase in flexibility of existing options
- Phase 2, a new pension option
Phase One – Changes to The Existing Pension Options
For the current tax year under capped drawdown, the maximum income you can take from a pensions drawdown arrangement is 150% of HMRC’s income limit – a limit dependent on your age. This is a 50% increase on the limit in the 2013/14-tax year. Flexible drawdown, which allows an income of any amount to be drawn from a personal pension is now available to anyone with income of at least £12,000pa – reduced from £20,000 pa. As before, this secure income must come from specific sources – such as state pensions, annuities and final salary arrangements.
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Phase Two – Introduction of a New Option
The changes from 6 April 2015 effectively remove income limits on everyone. Provided personal pension/SIPP investors have reached 55, they can draw whatever income they like. When tax-free cash is drawn, the applicable income pot can either be taken too or can remain in drawdown. There are a number of points to be aware of:
- Income Tax – Apart from the tax-free cash, the income from the pensions plan is taxed at your highest marginal rate of income tax. If you draw more than the tax-free cash out of the pension at any one time, it is likely that you will pay a higher rate of ‘Emergency Tax’ on the taxable amount. Consequently an incorrect level of tax could be deducted and will then have to be adjusted up or down by HMRC through self-assessment.
- Reduced Annual Allowance – Your annual pensions contribution limit on which you receive tax relief will be reduced from the current £40,000 level to a maximum of £10,000 if i) you draw an income directly from your pension through the new rules, or ii) convert existing drawdown arrangements to the new drawdown pension to access unlimited income.
- Fines for Orphan Pension Pots – Pension savers will be liable for a £300 penalty if they take cash from their pot and then fail to track down every single one of their other ‘orphan’ pension pots within 31 days. They must also send details to their scheme administrators/insurers as fines accrue at £60 a day after this.
- Pensions on Divorce – The unlimited pension access is not available where i) a pension sum is assigned after divorce and ii) where tax-free cash has already been taken from this.
This is a very brief overview of the planned changes to accessing funds accumulated in a pensions policy. Further details will be forthcoming over the next few months.
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