Munro Partnership: Linda Gilbert

Munro Partnership


Time to re-think your retirement planning

Earlier this year, the Chancellor outlined proposed changes to pension legislation which will cause people to think differently about their retirement savings. The Government has since confirmed those changes resulting in the biggest shake up to retirement planning for decades.

Arguably the most important change is introducing flexible access to pensions. From April 2015 investors aged at least age 55 will have total freedom over how they take an income from their pension savings. They could take the whole fund as a lump if they wish, or simply drawdown an appropriate income to meet their lifestyle.

In keeping with current rules, the first 25% will be tax free and the remainder will be subject to income tax at the highest marginal rate. Previously, clients who were in pension drawdown were generally restricted to how much pension income they could draw down or people who perhaps purchased an annuity would have committed to a fixed income for life at the time of purchase which may not turn out to be the best solution for them in later years.

With the abolition of income drawdown restrictions from April 2015, investors will be able to drawdown as much as income as they like. George Osbourne was quoted as saying ‘individuals who have worked hard and saved responsibly throughout their adult life should be trusted to make their own decisions with their pension savings’. The changes will remove some major psychological barriers to pension savings as funds will no longer be locked away out of reach.

It was also confirmed that anyone with a defined benefit, such as a final salary pension, will also be able to take advantage of the new rules. They will be able to transfer their final salary pension benefits to a personal pension arrangement, such as a SIPP. However, individuals in this circumstance could lose very valuable benefits if they were to transfer, therefore they will have to receive Independent Financial Advice before doing so.

One of the attractive features for people with sufficient pension funds is to consider passing on the asset to the next generation. Currently, if you are in pension drawdown or older than age 75, a lump sum which is paid in the event of your death to a non-spouse beneficiary is taxed at 55%. However, the Chancellor has confirmed this is being reviewed with a view that the 55% tax charge is unnecessarily high. Further information should be available later in 2014.

Most of the changes announced were focused on being able to access your pension savings rather than accumulating your pension fund. The maximum individuals can contribute each year is still fixed at £40,000 per annum with carry forward relief available from the previous 3 years. There are caveats being introduced from April 2015 to cap the contribution level at a lower amount of £10,000 per annum for certain individuals drawing down their pension benefits to prevent recycling the proceeds as contributions in order to claim the tax relief.

Therefore, in summary, if you are thinking of drawing down your pension benefits from next year it is important that you seek financial advice and guidance to ensure that your pension savings are maximised to suit your requirements. Likewise, if you have been put off saving through a pension fund, you should reconsider this as an attractive option for your retirement income.