City Trustees - part of Mattioli Woods



News and Media

21 March 2014

Our view: Budget 2014

Yesterday's Budget set out some significant changes that we believe have a positive impact on pension savings.

The consultation paper released yesterday Freedom of choice in pensions sets out the government's plan for the future of pensions and savings. This will bring about many long-term opportunities and wider flexibility surrounding pensions will positively help and assist your clients.

The Budget introduces a number of changes which take effect from 27 March 2014 and emphasise the requirement for providers offering bespoke pension products to be ready to offer this flexibility.

Budget summary

Pension savings

One of the most interesting aspects from our perspective is what is expected to be a tax-raising measure, brought about by changes to pensions.

The government has long since regarded annuity as the best way of providing an income in retirement. While it is no longer a requirement to purchase an annuity, for those who choose not to, the tax system becomes penal after age 75. All this is changing, with some variations taking effect from 27 March 2014.

Up until now, where an annuity has not been bought, there have been strict limits on the maximum income that can be drawn from pensions - rules designed to ensure that no one would squander their pension and become reliant on state benefit. The maximum income that can be drawn is being relaxed from 27 March 2014 and increased by 25%.

These limits do not apply to individuals who already have a guaranteed income of at least £20,000 per annum. Again, from next week, this income level is being reduced to £12,000. This means that anyone with a guaranteed income of £12,000 or more per annum can draw as much or as little of their pension fund as they wish. 25% of the pension fund can be taken as a tax-free lump sum, with the balance taxed as earned income. In many cases, this guaranteed income will be covered by state pensions alone, allowing tens of thousands of pensioners access to greater flexibility from their pension schemes.

It has been the case for some time that those with small pension funds can cash them in, in full, without having to comply with the restrictions above. These limits are being increased substantially, again from 27 March 2014. Those with pension funds worth less than £10,000 will be able to cash them in, even if they have other pension funds. Those with total pension funds of less than £30,000 will also be able to cash them in, in full - a significant increase from the current level of £18,000.

Looking further ahead, the government plans to pass legislation, effective from April 2015. This will remove all tax restrictions on access to defined contribution pension schemes, which we would expect to include personal pensions, SIPPs and SSASs. This means that those with these pensions will be able to draw as much of their pension fund as they wish, with 25% of the fund tax-free and the balance taxed as income.

HMRC believes that, taken as a whole, these changes will bring forward tax receipts by government, by making these options much more attractive than they are at present.

The government is also looking to provide a right to advice - a guarantee that everyone will be offered free, impartial, advice in relation to their pension. It is not yet clear whether this advice will apply only to those who wish to purchase annuities.

The changes to pensions will not initially apply to final salary pension schemes, because of their complexity.

There was no mention of lifetime or annual pensions allowances in the Budget speech.

The consultation also proposes the following changes:

  • Raising the minimum pension age from 55 to 57 in 2028 at the point the state pension increases to 67
  • Reviewing the rules surrounding the 55% tax charge on death of crystallised funds (no further details on this at the moment)
  • Reducing the age for individuals to draw a lump sum under trivial commutation to run alongside the minimum pension age
  • Introduce legislation to remove the option to transfer from a public service scheme to another defined contribution scheme, except in limited circumstances

Support from City Trustees

City Trustees offers pension products which are already designed to allow clients to make use of their newly gained freedom. Our bespoke products in particular contain the flexibility to allow clients to take full advantage of the new rules if they wish as well as complete investment freedom to manage their retirement funds with their IFA.

For further advice on how this could affect you and your clients, please call our dedicated IFA technical support on 0116 2408731 or email technicalhelp@citytrustees.co.uk

Non-IFA-advised clients of City Trustees seeking clarification should contact their account manager on 0116 240 8730 or email info@citytrustees.co.uk

 

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