In the 2014 Budget the Chancellor announced major changes for people approaching retirement, designed to allow people more freedom over how they take their pension fund. Several of these changes came into effect immediately after the Budget, on 27 March 2014. We summarised them in our article What the Budget means for UK retirees, which you can read here.
The article went on to mention further changes due to take place in April 2015. These include:
The potential for people aged 55 or more to take their entire defined contribution pension fund as a lump sum. The first 25% of this would normally be tax-free – as it is at present – with the rest added to the person’s income in the year of its withdrawal, with income tax on this amount to be paid at marginal rate.
In his budget speech, the Chancellor also announced that everyone who retires on defined contribution pensions “will be offered free, impartial, face-to-face guidance on how to get the most from the choices they will now have”.
Putting the Guidance Guarantee into action
With this in mind, the Treasury have been working with the Financial Conduct Authority (FCA) to develop a Guidance Guarantee service. Yesterday they announced more details on how this will work. Here are some of the key points:
The Guidance Guarantee will bring retiring people access to impartial guidance from certain independent advisory organisations designated by the Treasury. These are likely to include The Pension Advisory Service (TPAS) and the Money Advice Service (MAS).
This guidance could be delivered face-to-face, by phone, or online. Before it takes place, the guidance provider will tell customers what information they’ll need to have on hand. You’ll need to do some thinking about your retirement needs before speaking to them.
The aim of the guidance will be to give customers key facts about their options and what the consequences of their choices might be. It won’t, however, replace the advice you could receive by paying for a professional financial adviser. Aviva will also, of course, continue to support you in making your retirement choices.
There won’t be a limit on how often you can use the Guidance Guarantee service.
If you’re transferring money from a defined benefits scheme you’ll be required to take advice, which you’ll need to pay for in most instances. This will be a statutory requirement designed to protect people from making a decision likely to make them worse off.
If you choose to take more than 25% of your pension fund as cash
At the same time, the Treasury has announced the results of their consultation on ‘Freedom and Choice’ which discussed how the changes announced in the Budget would be put into action.
You can, of course, save as much as you like towards your pension each year, but there’s a limit on the amount that will effectively get tax relief. This is called the annual allowance, currently standing at £40,000. It has now been made clear that:
If someone over 55 chooses to take more than the 25% of their pension fund which they’re normally allowed to take tax free, their annual allowance will be reduced to £10,000 unless their pension funds are below a specific level. This is to mitigate the possibility of tax avoidance.
If you’ve already taken flexible drawdown you aren’t currently allowed tax relief on any contributions you pay into your pension. But from April 2015, you’ll effectively receive tax relief up to an annual allowance of £10,000 a year.
If you’re already taking income using capped drawdown you’ll still effectively receive tax relief on contributions into your pension of up to £40,000 a year, provided you don't take more income than you’re allowed to do under the current regulations (the maximum amount is roughly equal to 1½ times the equivalent annuity that your fund could buy). Exactly how this will work has yet to be confirmed. Capped drawdown won’t be available for anyone taking their pension for the first time after 5 April 2015, and anyone who draws more than their tax free lump sum will be subject to the reduced annual allowance of £10,000.
What will it mean for you?
There’s plenty to think about – and there’s no doubt that the changes to pensions will have very far-reaching effects, offering a much greater degree of freedom in the way people can choose to take their pensions.
One of the most significant developments is the fact that you’ll be able to receive free, impartial guidance. This will involve a degree of personalisation, so you’ll be able to apply it more directly to your own individual circumstances.
As always, Aviva will help you to get the facts you need about significant changes like these. We would also recommend that you speak to a financial adviser before making important financial decisions.
You’ll find plenty of information about pensions on our website, including our Retirement planner online tool to help you get some idea of how much income you might have once you’ve retired.