Pensions – autumn update
There is a lot of activity in the pension world at the moment, including some significant changes to how and when pensioners can access their funds. To encourage investment, the 2014 Budget announced that pensions would be made more flexible from 2015. The majority of our dental and medical clients choose a pension scheme as part of a retirement plan so as 2015 is now just around the corner spend some time reading this short Pensions Update to ensure you are aware of the changes that may affect you.
Flexible Pensions – key points
Draw your funds earlier
From April 2015 it will be possible to draw your entire pension fund from age 55, if you choose to. Sounds great doesn’t it? So you can pay off your mortgage and buy yourself the sports car you have been thinking about!
This is relevant for Defined Contribution Schemes, such as a Self Invested Personal Pension (SIPP).
What’s the catch?
It is good news and it certainly does offer flexibility for pension savers, however there is a catch; tax does apply, at least in part, as follows:
– 25% of fund – tax free
– 75% of fund – subject to normal income tax at 20%, 40% and 45%
Because tax relief is available on payments into personal pension plans, there have been anti-avoidance rules written into the guidelines.
For example, a 55+ year old could not pay money into a pension fund and obtain tax relief and then immediately withdraw 25% of the funds tax-free.
To further prevent this situation, when a pension fund is in a state of “drawdown” a maximum of £10,000 per year can be invested into the pension and be considered eligible for tax relief.
Pensions and Inheritance – key points
Abolishment of 55% tax on death
Further changes to pension legislation give way to scope for IHT planning. This is due to the proposed abolishment of the 55% so called “Death Tax”.
From 2015, unused savings in drawdown pensions can now be transferred to loved ones, which is a highly positive change in legislation.
If the pension holder is under 75 when they die then their pension pot can be passed to their named beneficiary completely tax-free. Also, the beneficiary can withdraw money from the pension fund, tax-free and whenever they choose, with little restrictions relating to amount or age.
If the pension holder is over 75 upon death then the transfer to a beneficiary is also tax-free however, marginal income tax rates are applied at 20%, 40% and 45% on withdrawals, again though with no restrictions around withdrawal amounts and timing. There is also the option to draw a lump sum but here 45% tax applies.
In summary, it means that pension funds can be invested into with an understanding that there is no longer this archaic policy restricting when you can access your savings. In addition, unused savings can be passed to beneficiaries on death.
This is set to encourage more innovative future pension products and will instil more confidence into the using pensions as a solid retirement vehicle.
Further help – GOV.UK website
From September 2014 the pensions guidance moved to from HMRC site to GOV.UK. Further information can be found here.
Lansdell & Rose help hundred of doctors and dentists with effective tax and retirement planning and we are up to date with pension rules and regulations.
Call today to speak to one of our experienced and helpful team about your pension situation: 020 7376 9333