When the budget was announced in March there were a few surprises. Arguably one of the standout points was the changes to pensions.
A quick reminder of the changes:
- No more tax restrictions on pension drawdowns.
- No requirement to buy an annuity
- There will no longer be a punitive tax on drawdowns larger than the tax free lump sum.
- The size of a “small pot” pension has risen to £30,000
There are some significant changes here.
The current system only allows for taxpayers to withdraw 25% of their pension pot tax-free when they retire and also requires pensioners to buy an annuity with their remaining pension.
Taxpayers who withdraw in excess of 25% are hit with a punitive tax rate of 55%.
The new changes – starting in April 2015 – would see that excess drawdown be taxed at the person’s marginal rate dependent on income.
The complexity of choosing an annuity and associated fees will be removed.
Also if your pension pot is below £30,000 you can take it all out tax free – a noteworthy increase on the previous £18,000 limit.
So why are we flagging up this up now?
Well, the treasury announced last week that savers will be entitled to free independent guidance when the changes come into play next year.
George Osborne has said the government will ensure “people get the best possible guidance and that this is genuinely impartial”.
But this offer has been met with scepticism in some corners and will certainly put pressure on pension providers among other organisations.
Realistically any guidance is likely to be very basic given that it is a free service.
Pensions can be a complex area and advice from an accountancy firm would certainly be far more personal and expansive.
Can a nationwide pension advice service be set up by next year? There is no international precedent for such a service.
Further questions have been raised both in the Commons and by the FCA over the role of the Money Advice Service in giving advice. They already play a role in providing pension advice but its function and capabilities with regard to this new plan has been questioned.
We can only wait and see how this guidance service develops. It’s an interesting proposition and we will be monitoring its progress.
If you are approaching pensionable age and have any queries about how these changes might affect you or want to learn more about the Government’s new initiative get in touch.