How pension reforms could affect your retirement

05 February 2015

The pension reforms set out in the latest Budget are good news for people planning their retirement. The changes provide individuals with greater freedom when it comes to managing their income once they decide to start taking their pension benefits.

From April 6, 2015, those over the age of 55 will be able to take their entire pension fund as cash, although only the first 25% will be tax-free.

The remaining 75% of the fund will be taxed at the individual’s marginal income tax rate. (Marginal income tax rate means either the highest rate at which you currently pay tax, or possibly higher if the earnings or income in question take you over a certain threshold.)

Alternatively, they will be able to choose to take their tax free cash amount and purchase an annuity or consider one of the other products available on the market.

People will need to consider these choices carefully based on varying personal circumstances, making sure they have enough money to live on throughout a hopefully long retirement.

Saga believes that annuities will continue to meet the needs of those who seek a guaranteed income for life.

Read more about the pension changes.

Changes that became effective on 27 March 2014:

  • If you are age 60 or above and have a pension policy that has a value of £10,000 or less, you can take all of the money in that policy as a lump sum. You can do this for up to three pension policies if they each have a value of less than £10,000. One quarter of the amount will be paid to you tax free, and the rest will be taxed at your marginal rate of income tax.

  • If you are between age 60 and 75 and have a pension policy larger than £10,000, you can still take it as a lump sum, if the value of all your pension funds added together (including any pensions in payment, but excluding the state pension) is below £30,000. Again, one quarter of the amount will be paid to you tax free, and the rest will be taxed at your marginal rate of income tax.

  • For capped drawdown arrangements, the maximum amount of income you can take is increasing from 120% of an equivalent annuity to 150%. And the minimum level of guaranteed income needed to access flexible drawdown has been reduced from £20,000 to £12,000.

Changes effective from 6 April 2015:

  • Anyone over the age of 55 will be able to either:
  1. Take your entire pension pot as cash, with 25% tax free (available to individuals in ill-health before age 55) or  make a series of withdrawals over time and receive 25% of each withdrawal tax free. In both options, the remainder of the withdrawal will be subject to your marginal income tax rate (the current rate for full withdrawals is 55%) or

  2. Take 25% of the pension fund as tax-free cash and use the remainder to provide a regular income via income drawdown or an annuity. Income taken through either income drawdown or an annuity will be subject to income tax at your marginal rate.
  • 55% pension ‘death tax’ will be abolished. Currently, 55% tax is payable on any lump sum that is passed from the pension fund if death occurs after the 75th birthday.  From April 6, if you die after age 75, the beneficiaries will be able to take the whole fund as cash at once, which will be subject to 45% tax, or take a regular income through drawdown or annuity which will be subject to their marginal income tax rate.
    The Government also intends to make lump-sum payments subject to tax at the marginal rate (not a flat rate charge of 45%). It will engage with the pension industry in order to put this regime in place for 2016-17.

  • The Government has said that everyone will have access to free and impartial guidance on how to get the most from the choices available at retirement. It will not be mandatory for people to take this guidance to access their pension savings, but they will be signposted to the pensions guidance service before they do. The Treasury announced in October 2014 that the Pensions Advisory Service (TPAS) will deliver telephone guidance, and face-to-face guidance will be delivered through the Citizens Advice Bureaux (CAB).

Future tax system for accessing defined contribution pensions at retirement

Under the new system, regardless of the size of their defined contribution pension pot, everyone will be able to choose any of the options in the diagram above. This will mean that everyone has access to full withdrawal, an annuity or drawdown, and potentially other products created by providers.

Confused by the pensions jargon? Read our guide.

Saga Annuity Service

If you are thinking about buying an annuity, you may want to consider the Saga Annuity Service provided by Legal & General. You can call on 0800 068 6228 for your personal annuity quote.

If you are unsure about your retirement income needs, you can speak to a qualified expert by phoning the Saga Financial Planning Service provided by My Wealth on 0800 206 1812.

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.