Chancellor George Osborne delivered his autumn statement last month, much of which confirmed what we already knew, and which was covered in our October article.
However, there were one or two surprises and so it is perhaps worthwhile both confirming some of the good news, and unwrapping those unexpected financial gifts.
Pensions: what’s the good news?
April 5 will herald a brave new dawn of pension flexibility.
Gone will be the requirement to buy an annuity and, from the age of 55, people will have the ability to access as much of their pension pot as they wish.
Of course, caution should be urged in this respect as pension funds should primarily be seen as a source of income in retirement. If money is spent in the short term, individuals may well have insufficient funds to last them in retirement.
However, provided care is taken, greater flexibility will be available for those who may previously have been frustrated with the narrower alternative options of either annuity purchase or drawing down income with a limited ceiling.
Q What options are there when taking money out?
A The ability to draw a flexible and unlimited amount of income, in addition to the 25% tax-free lump sum, will provide much wider scope for general retirement planning.
If larger capital sums are required in the short term, perhaps a wedding to pay for or a replacement car, then a larger pension amount could be taken whilst retaining the balance for future years.
Provided the pension plan allows, individuals will have the ability to access infrequent and indiscriminate amounts of pension fund as and when they so wish.
Q What happens to pension funds on death? A More detail was provided in relation to the position on death before age 75.
We already knew that from April this year the proposal was that ‘drawdown’ pots could be passed to beneficiaries with no liability to tax.
However, the vast majority of people who have annuities and not drawdown funds were given some very welcome news.
Essentially, if an annuity has been bought with a spouse’s entitlement, or an unexpired guaranteed period in the event of death before age 75, then this will also be payable free of income tax. Effectively, this brings the treatment of annuities into line with drawdown rules, a very welcome and fair amendment to the original proposals.
On death after the age of 75 any beneficiary will pay income tax on funds they draw.
It was confirmed that for 2015/16, this will be at a flat rate of 45%.
In subsequent years, however, the beneficiary will pay income tax at their relevant rate on any sums drawn.
Importantly, any beneficiary can leave money in the pension plan and draw money from it as and when they choose, leading to opportunities to remain within income tax thresholds.
Is there any bad news?
On the down side of these changes, if the new flexible use of pensions is triggered, individuals will be restricted to a reduced maximum annual allowance of £10,000 which can be paid into a pension, in addition to which the use of ‘carry forward’ of previous years’ allowances will no longer be available.
Q What about ISA ‘inheritability’?
A This is where the Chancellor really sprang a surprise.
With effect from the date of the autumn statement people will, on death, be able to pass on the full value of their ISA portfolio to spouses and civil partners within the tax-exempt status of the ISA ‘wrapper’.
Conceivably, this could lead to substantial funds remaining in tax-exempt funds, which previously have been their deceased partner’s ISA fund, in order to retain the tax advantages of the wrapper.
There will be no impact on the spouse’s/civil partner’s own ISA annual allowance.
Q Do these changes create planning opportunities?
A Very possibly. The traditional objection to pension funding has always been a frustration at the inability to ‘get the money back’ that has been put in.
That objection will become obsolete after April 5. Any money paid in will effectively be either:
* Fully accessible after age 55.
* Paid to beneficiaries tax free on death before age 75.
* Payable to beneficiaries at their own rate of income tax on death after age 75.
As a result of this new era of pension flexibility, people may be much more inclined to take advantage of the tax relief available on contributions, safe in the knowledge that beyond age 55, the fund will be available in the event that capital is needed due to a sudden change in circumstances.
Money previously held in a bank savings account, for example, may possibly be put to better use by redirecting this into pensions in order to obtain tax relief, tax-free growth, and a 25% tax-free lump sum. This may be of benefit for those already using the current flexible pension options.
Whilst we would always urge caution in the prudent use of pension fund monies, there is no question that these impending changes will widen the choices available for UK savers. It brings into sharp focus the increased advantages and flexibility now available through pension planning, whilst removing some of the long-standing concerns held by many.
In addition, the Government seems to be increasingly keen to incentivise and help those who want to save that alone has to be a good thing!
* Any references to tax and legislation is based on our understanding of law and HM Revenue & Customs practice at the date of publication.
Tax and legislation are liable to change. Tax relief may be altered, and the value to the investor depends on their financial circumstances.
The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.
Investment entails risk, which means the asset values can increase or decrease and you may not get back what you put in.