(Updated 22 Oct 2014)
What the 2014 budget means for UK retirees
The 2014 budget brought some major changes for people approaching retirement.
Radical reforms will give people more freedom over how they take their pension fund.
The Chancellor also announced a series of changes to savings, including higher limits and more flexible ISA rules.
If you want to know more about the changes and how they could affect you, read on.
From 27 March 2014, the following changes came into effect:
1. If your pension funds from all your schemes total £30,000 or less, you can choose to take them as a lump sum. Before the change the limit was £18,000.
2. You can take up to three personal pension funds of £10,000 or less as a lump sum. This includes group personal pensions provided by your employer. Before the change, you could only take up to two personal pension funds of up to £2,000 each as a lump sum.
If you have pension funds of £10,000 or less in an occupational scheme, you may also be able to take these as a lump sum. Check with your scheme administrator / employer, as it will depend on their pension scheme rules.
For points 1 and 2:
3. If you have capped income drawdown, the amount of income you can take from your fund each year is going up from 120% of an equivalent annuity to 150% of an equivalent annuity.
4. If you have flexible drawdown that allows you to take unlimited withdrawals, you now need a guaranteed annual income of at least £12,000 a year from other sources. Before the change, you had to have an income of £20,000 a year to do this.
I’m ready to retire. What happens now?
Your pension company will write to you shortly before your planned retirement date. They’ll outline your options and give you an idea of how much retirement income you can expect with an annuity.
If you’ve heard from your pension company recently, it’s a good idea to get in touch with them to check whether your options have changed. If your pension is with Aviva, call us on 0800 046 8406.
How do I know whether I have an occupational or personal pension?
Occupational pensions have a board of trustees, so if you have received communications from the trustees you probably have an occupational pension. Personal pensions are most commonly provided by large insurers, like Aviva.
If you are unsure what sort of pension you have, you can ask your employer.
Where can I find out more?
You can read more about the pension changes in the budget and what they mean for you at www.hmrc.gov.uk/pensionschemes/benefits-reg-pens-schemes.htm
We've also created this useful guidance tool to show you some of your possible options. There are three simple questions to answer www.aviva.co.uk/pensions-and-retirement/retirement-options
What’s changing soon?
The government is planning further changes from April 2015.
You’ll be able to take your entire defined contribution pension fund as a lump sum when you reach 55. It won’t matter how much you have in it, or if you have any other sources of income. You’ll normally be able to take the first 25% tax-free, and you’ll pay tax at your marginal rate on the rest.
At the moment, you can usually take up to 25% of your pension fund as a tax-free cash lump sum. But you have to take a taxable income – like an annuity – with the rest.
This change won’t apply to defined benefit pension funds, or final salary pensions as they’re more commonly known. But you will be able to transfer from a private sector defined benefit pension scheme to a defined contribution pension scheme (like a personal pension) to take advantage of the new flexible choices.
Giving up your defined benefit pension shouldn’t be done lightly, so you’ll need to talk to a financial adviser before transferring. The trustees of your scheme will also need to check you’ve received this professional advice before agreeing to the transfer.
Your new choices
You’ll have four main choices depending on the options offered by your scheme:
Thinking about your tax position
If you’re taking money out of your pension, you can normally take a quarter of each amount you use to provide benefits tax-free. Anything above this will be taxed at your marginal rate.
Alternatively, you could use your whole pension fund to provide benefits by, taking the maximum tax-free lump sum and leaving the remainder invested. In other words, you could leave the taxable bit where it is for now – something you should certainly consider if you expect to be paying a lower rate of income tax in the future.
You need to think carefully what option is best for you, as the different options have different tax consequences. A key one is that some options will restrict the amount of tax advantaged pension contributions that can be paid in the future. If you are in any doubt, consider talking to a professional financial adviser.
New rules about passing on your pension when you die
The government is also bringing in new rules concerning what happens to your pension if you die. These will take effect when payments following your death start from 6 April 2015.
If you’re under 75 when you die:
If you’re 75 or over when you die:
The Guidance Guarantee
As these new options will expand your range of choices, the government has also announced that everyone will have the right to impartial guidance at retirement. This service is still in the early stages of development, but at the very least we expect that there will be a comprehensive website setting out your options. There’s also likely to be a telephone helpline.
Although you might feel you can get all the information you need elsewhere – including here on Aviva’s Retirement Centre – we’d still strongly encourage you to take up the Guidance Guarantee offer. After all, the service is impartial and free, so why not seek a second opinion?
New ISA rules from 1 July 2014
Other changes to savings
The government is increasing the income tax personal allowance from £10,000 in 2014/15 to £10,500 in 2015/16.
Clive Bolton, Aviva’s managing director savings and retirement, says:
“We’ve long campaigned to make sure customers get the best retirement income they can, and we’ll continue to do so. In light of these changes, helping people access the right information and good value products that meet their individual needs is more important than ever.”
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