Posted by Nick Day on 04 Aug 2014
UK Pension Regime: A New Age
The dust has to a certain extent settled since the Government announced to everyone’s great surprise in the 2014 Budget that members of Defined Contribution (DC) UK pension plans would have far greater flexibility in accessing their pension savings on reaching age 55.
Previously, it was necessary to buy an annuity or use a drawdown arrangement but from April 2015 DC members will have the flexibility to have their retirement savings paid out when they wish and in any amount they wish. It will still be possible to take a 25% tax-free lump sum, and any further amounts withdrawn will simply be taxed at the individual’s marginal tax rate in the year they are taken. An annuity can still be bought if that is the individual’s preferred route.
New Roles for UK Pensions
Hand in hand with these new rules, DC members will be entitled to guaranteed and free impartial guidance on their retirement choices, to be provided by independent parties rather than pension schemes providers. The advice will be available via face to face meetings, via telephone, and via on-line services, and will be paid for by a levy on regulated financial services businesses.
Individuals who have private Defined Benefit (DB – or final salary) pension pots will in broad terms still be able to make transfers to DC schemes to take advantage of the new rules but transfers from unfunded public DB schemes will not be allowed.
Many people over the last few years have taken the decision to invest in tax-free ISAs rather than make pension contributions, and it will be interesting to see whether some will move back towards registered pension savings. It is now possible to invest £15,000 per year in an ISA but although funds can be withdrawn at any point, no tax relief is due “on the way in”. Within certain more generous limits, pension contributions receive tax relief at the taxpayer’s marginal income tax rate when made, but currently, the funds cannot be accessed until age 55 when (other than the 25% tax-free lump sum) they will be taxable.
There are other tax-efficient investments available such as Venture Capital Trusts, Enterprise Investment Schemes, Seed Enterprise Investment Schemes, etc. but these carry an increased element of risk for the investor.
UK Pension Advice from Tax Innovations
We cannot advise you on the financial risk, for which you should take independent advice from a qualified financial investment adviser, but we can advise you (or work with your financial adviser) on a sensible year on year tax strategy for your investments.
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