New pension freedoms coming into force on 6 April 2015 provide a good opportunity to revisit retirement plans. The new rules will allow greater access to pension pots for those who have reached the age of 55 and will mean more people than ever can choose how and when they access their pension. To recap on the rules, those aged 55 and over can take 25% of their pension pot as a tax free lump sum. Any further lump sums or income taken will be subject to tax. In terms of accessing your pension the main options to consider remain an annuity, which provides a guaranteed income for life, or go into new flexi-access drawdown (FAD), which allows you to access your pension when and how you wish subject to paying tax. While there are other variations on pension access post April 2015 to consider, the key change is that more choice is available.
Another major change is that pensions will no longer be subject to 55% tax on death, which im-proves the potential to pass on wealth without being penalised financially. If you die before reaching age 75 you can pass on your pension pot tax free to anyone. If you die after age 75 the beneficiary of your pension will pay tax at their marginal rate under current proposals from 06/04/16. Annuities taken out after 6 April 2015 will be subject to the same rules. Of course, as with any new rules it’s never completely straightforward and the new pension rules are no exception. Those in defined benefit (or final salary) schemes will be subject to different rules and, where pensions are already in drawdown prior to 6 April 2015, there are different options to consider. Much will depend on what your retirement plans are and, in the light of the new rules, whether a different strategy is now more applicable. Flexi-drawdown, for example, offers some fantastic financial planning opportunities for those thinking of winding down at work sooner than initially planned. With flexi-drawdown there is no upper limit on how much you can withdraw, subject to tax, plus you can continue saving towards retire-ment. This is particularly useful as it allows those heading towards retirement the ability to work less and supplement earnings by taking an income from their pension once they are in a lower tax rate. This gives the option to draw down up to £41,450 of your pension per year over and above the tax free lump sum, with the first £10,000 tax free and the remainder only taxed at the 20p tax rate. (tax rates as at March 2015).
By contrast, those who are currently in capped drawdown and have the ability to make large pen-sion contributions, or company directors who take a smaller salary in order to pay the maximum into pensions, not converting to flexi access may offer more potential to build up a tax free pension pot. The key to not getting into a pension tangle in the coming months is to get to your finances in shape and understand the choices open to you. This will minimise any consequences of wrong actions taken – including inaction – and maximise benefits the new pension rules have to offer. For further information on your pension options please contact Dharmesh Upadhyaya 0208 418 2708.