Radical Changes to UK Pensions Proposed by UK Chancellor
In the 2014 Budget the UK Government has proposed a radical overhaul of existing rules relating to how people access their UK pensions. While some changes have been introduced from 27 March 2014, it is the changes to be introduced from April 2015 that could have the greatest impact. A summary of some of the key proposals include:
- Allowing members of defined contribution schemes (workplace pension schemes) to access their pension funds in full from age 55 without the need to purchase an Annuity. The existing UK tax free lump sum of 25% of the value of the fund would continue to be available with the balance of any funds then taken being taxed at the member’s marginal tax rate.
- Removing the ability for those with UK public sector pensions (final salary pensions) to transfer their pensions out to other defined contribution or personal pension schemes (for example to take advantage of the increased flexibility being introduced in defined contribution and personal pensions described above).
- Consulting on whether to restrict those with private sector defined benefit schemes (final salary pensions) to be able to transfer them out to defined contribution or personal pensions like for public sector schemes.
- Reviewing the current 55% UK tax applied upon a members death with a view to potentially reducing this. By way of example, this tax is currently applied when a member has already started to draw a pension and the beneficiary wishes to take the remaining pension as a lump sum payment.
- Consulting on whether to increase the earliest age a person can take pension benefits in the UK from the current age 55 to 57 by 2028 (with a phased transition before then). Thereafter, the age would rise in line with the State Pension age so that it was always 10 years below State Pension age.
In addition, from 27 March 2014, the following changes took effect for UK pensions:
- An increase in the capped income drawdown limit from 120% to 150% of an equivalent Annuity. The capped income drawdown limit currently determines the maximum level of income a person can draw from their UK personal pension on an annual basis (unless they qualify for flexible drawdown).
- A reduction in the minimum income requirement to qualify for flexible drawdown from £20,000 to £12,000. The minimum income requirement is the amount of income a person must receive from certain sources in order to take flexible drawdown.
- An increase in the trivial commutation limit from £18,000 to £30,000. For people over 60, if they have total pension benefits under all of their schemes that do not exceed this limit they can cash in all or part of the benefits.
- An increase to the “small pot” lump sum a person can take from a pension from £2,000 to £10,000. For people over 60, if they have pension benefits under a particular pension scheme that do not exceed the limit, they can cash in those benefits irrespective of the value of the pension benefits they hold under their other schemes.
Given the sweeping changes being proposed by the UK Government, it is difficult to predict what form these proposals will eventually take when enacted in law by April 2015. A consultation has been launched by the Government on these changes which closes on 11 June 2014 with a prompt response promised thereafter.
While people will certainly welcome having greater flexibility in deciding when and how to access their UK pensions in the future, there are also concerns as to how people will make the correct choices.
It is clear that more than ever people will need access to financial advice which takes into consideration their specific retirement objectives in order to ensure they understand and maximize their UK pension benefits.