(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:
You can choose these options from your 60th birthday.
You can take a quarter of your maturing pension funds tax free. You’ll have to pay tax on the rest of these lump sums at your marginal income tax rate. Remember that this taxable lump sum could take your income into a higher tax band.
In some circumstances, HMRC treat personal and occupational pension funds separately. This means you may be able to take more than £30,000 from your pension funds as a lump sum by using both sets of rules.
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 the My Retirement Planner tool to show you some of your possible options. http://www.aviva.co.uk/pensions-and-retirement/tools-and-calculators/my-retirement-planner
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:
Leave your pension fund untouched. This will suit people who haven’t yet decided to retire, or who want to carry on saving for some time before taking anything out of their pension pot
Withdraw all your money at once
Take money from your pension fund as and when you need it
Use the money in your pension fund to buy a secure, guaranteed income for life.
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:
Any pension pot which you haven’t yet cashed in can normally be paid tax-free. It won’t normally count for inheritance tax purposes either.
The same tax treatment applies to your remaining pension fund if you’re taking income from your pension pot as and when you need it (income drawdown), or if a cash lump sum is paid from your annuity on death.
Alternatively, from 6 April 2015, your remaining pension fund can be passed to anyone you nominate and they can draw income or capital which will be tax free.
It may be that your spouse or dependants receive income from your annuity, or a defined benefit (final salary) pension, after your death. If so, these payments are taxable at your spouse’s or dependants’ marginal rate of income tax.
If you’re 75 or over when you die:
Any remaining pension fund – whether or not you’ve started taking money from it – can be paid, subject to a 45% tax charge. This applies to payments made between 6 April 2015 and 5 April 2016. It won’t normally count when calculating inheritance tax. The same rules apply if a cash lump sum is paid from your annuity on death. If your beneficiaries wait until after 5 April 2016, any such amount they are paid would be taxed at their marginal rate of income tax.
Alternatively, from 6 April 2015, your remaining pension fund can be passed to anyone you nominate. They can then draw income or capital which will be taxed at their marginal rate of income tax.
If your spouse or dependants receive income from your annuity, or a defined benefit (final salary) pension after your death, these payments are taxable at their marginal rate of income tax.
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
- New ISA allowance – from 6 April 2014, the amount you can invest into an ISA each tax year increased to £11,880. From 1 July 2014, it increased again to £15,000.
- More flexibility – under the new rules you’ll be able to split your £15,000 ISA allowance between cash and stocks and shares ISAs in whatever proportion you like – all of it in cash, all of it in stocks and shares, or any split you choose. Currently, you can only invest up to half your total ISA allowance in a cash ISA.
- New transfer options – from July 2014, you can transfer your money from a stocks and shares ISA to a cash ISA and vice versa. Previously, you could only transfer from a cash ISA to a stocks and shares ISA.
- Tax-free interest – there will no longer be any tax to pay on interest from stocks and shares ISAs.
- Junior ISAs – the amount you can invest into a Junior ISA each tax year increased to £4,000 from July 2014.
Other changes to savings
- Pensioner bonds – from January 2015, new fixed-rate savings bonds from National Savings and Investments (NS&I) will give over-65s a choice of market-leading savings bonds. The government’s Autumn Statement will bring more details and rates.
- Premium bonds – from June 2014, you can have up to £40,000 in premium bonds. This is up from £30,000. Also, there are now two £1 million prizes each month – up from one.
- No 10% starting rate from savings – from April 2014, a starting rate of 10% has applied to the first £2,880 of savings income above the tax-free personal allowance (unless you have earned income which takes up the starting rate band). From April 2015, this will be cut to 0% and the band extended to £5,000.
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.”