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2014 Budget - Pension Reforms
2014 Budget - Pension Reforms
Intro
o Recently working on Pilot looked into different pension options
Annuity + Cash lump sum + Flexi-draw
Temporary rules
Ran from 27 March 2014 to 6 April 2015
o Over 60 + havent touched pension pot + total pension savings =
no more than 30,000 can withdraw all of the saving
o First 25% of the money you take out = tax-free
o Rest is taxed as the top slice of your income in the tax year of
withdrawal
Pension schemes explained
Final-salary scheme Guaranteed pension based on earnings at end of
career + length of service i.e. DB schemes
Career average scheme Guaranteed pension based on average pay
over career
DC scheme Determined by contributions + investment returns
o Usually worth less than DB
o Savings used to buy an annuity or retirement income - until now
Examples
Clara is 62 and has no other income, but does have a 20,000 DC pension
pot. She withdraws all 20,000 in one year. She receives 5,000 (25%)
tax-free and pays no tax up to her personal allowance of 10,000. She
pays 20% tax on the remaining 5,000.
Denise's pension pot is also 20,000. She is still working, and earns
65,000 a year. She decides to empty her pension pot. Like Clara, the first
5,000 would be tax-free, but the balance of 15,000 is taxed at 40%,
because she has already used all her basic rate tax band.
What is an annuity?
"Capped drawdown" take some money out each year
o Amount you can withdraw from drawdown fund will increase from
120% to 150%.
If capped drawdown + at least 12,000 a year of "secure pension income"
(including state pension & annuities in payment)
o Can move to "flexible drawdown" = gives complete freedom over
how much you take out of the pension pot
Before 27 March you could only move to flexible drawdown if
you had secure pension income of at least 20,000 a year
If you die after 75, and your descendants want the whole pot as a lump
sum, they will have to pay 45% tax, instead of 55% previously.
Those who draw down income from an inherited pot will, in any case, pay
tax at their marginal rate.
Annuity
Drawdown
Fixed income
Variable income
No enhancement option
policy. So the recently retired may feel as though they have missed out on
greater choice and better deals.
6. Remaining annuity deals are less generous
Millions of people are being signed up to defined contribution pensions,
through the automatic enrolment workplace pension scheme.
7. The Bank of Gran and Grandad opens for business
The amount of money tucked away in pension pots might not be very big not enough, as mentioned earlier, for most to buy a property.
Yet, a significant chunk of cash could be used as a loan to grandchildren
who are struggling to get on the housing ladder, or facing the cost of
paying for further education.
However, as explained earlier, taking out a big chunk of money in one go
will probably lead to an income tax charge for Gran and Grandad.
8. Inheritance tax becomes a bigger issue
When you buy an annuity, your pension pot is spent on an annual income
that lasts for as long as you live. The longer you live, the better value for
money it is.
As a result, insurance companies selling annuities are making a calculation
or bet based on how much longer they think you will live. Smokers and
those with health problems can get a better deal, owing to the shorter life
expectancy.
When you die the income generally ends, so cannot be claimed by your
family.
Under the new rules, a pension pot can be taken as cash, become part of
your estate, and be passed on to your children. However, unless it is
invested in a way that avoids inheritance tax, it could push the assets left
in a will over the 325,000 threshold that means inheritance tax will be
levied.
9. The mis-selling threat picks up again
Millions of people will still save for retirement in a pension organised by an
insurance company. This company will have your money and will try to
encourage you to use it to buy one of their products when you reach
retirement.
Clearly, there is nothing wrong in that, although it might not give retirees
a clear picture on whether it is a good deal. With lots of financial firms
wanting to get hold of that money, there is a danger of a minority of them
overstating what is being offered.
The sector is regulated, giving individuals the opportunity to challenge and
win compensation if they are mis-sold a product.
The government is also making it a requirement that retirees receive some
guidance from their pension company, but it is not clear whether this will
be impartial or free.
10. Companies lose a source of credit