TT201: Pensions and Savings Changes

As ever, the only constant is change, and in the Chancellor’s 2014 Budget are significant changes to both the pensions regime and ISAs.

Pensions – Changes to the pensions regime will make it easier to access your pension fund pot if you have a defined contribution (money purchase) pension scheme.  As a general rule, 25% of the fund can be taken as a tax-free lump sum at age 55, although this age will be increased in future to be 10 years prior to State pension age (age 57 in 2028).  In addition, the requirement to purchase an annuity at age 75 had already been abolished with the introduction of “flexible drawdown” pensions currently available.

From 27th March 2014, however, the Government has increased the maximum amount that an individual can take each year from a capped drawdown arrangement, from 120% to 150% of the equivalent annuity.  For example, if the annuity rate happens to be 6%, then up to 9% of the funds can now be drawn each year.  This is in response to concerns about low annuity rates, excessive charges, and the inflexibility of existing pension arrangements.  With the onset of auto-enrolment, and changing demographics forcing the Government to withdraw from State provision, one can only assume that these changes are here to stay, with perhaps even greater flexibility in the future, to encourage individuals to make provision for their own retirement.

The Government has published a consultation document to consider proposals to make the drawdown rules more flexible from April 2015, allowing individuals to draw more than the 25% of their fund limit, subject to a tax charge.  This charge will be at the individual’s marginal rate of tax, instead of the current 55% charge on the fund.  Of course, under current tax rates, the marginal rate could be as high as 45%, depending upon other retirement earnings.

The other significant change being consulted on is the proposal to reduce the guaranteed pension income limit of £20,000 to £12,000 per annum.  Those with this level of guaranteed pensionable income will be able to draw as much or as little as they wish from their pension fund each year without the 150% equivalent annuity rule applying.

ISAs – Important changes to ISAs were also announced in the Budget.  Primarily, to encourage savers the £11,520 ISA limit is to be increased to £15,000 from 1st July 2014.

Furthermore, the current 50% cash ISA limit of £5,760 is to be abolished so that any combination of cash and stocks and shares can be held within the ISA wrapper up to the overall £15,000 limit.  These products will be termed “new ISAs” or NISAs.  The junior ISA limit will increase to £4,000 from 1st July 2014.

As always, please do contact your Barnes Roffe partner should you require any further information.  In addition, other details relating to the Budget changes can be found within our own Budget Summary.

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