Excitement – not a word you would usually associate with pensions, but the recent budget caused more than a ripple of excitement and surprise amongst everyone involved with the pension industry. In a move anticipated by precisely nobody, the Chancellor, Mr Osborne, announced in his recent budget, the proposal that with effect from April 2015, people would be able to take ALL of their pension funds as a lump sum, from age 55. This, in a stroke, took away the most popular objections to pension saving, namely inaccessibility and inflexibility.
Up until relatively recently, people were forced to buy annuities with their pension funds – fine when annuity rates were good, but a major issue when annuity rates were poor, as they are at the moment. The introduction of Income Drawdown in the 1990s was a major step forward, but most people would still be “forced” into buying an unpopular annuity with their hard earned pension funds. Therefore, the recent budget was a seismic change for all people who held pension funds.
How does this affect people in practice?
Whilst we think that the changes are, on the whole, great news for people with pensions, there are dangers and downsides. Firstly, whilst you can take all of your pension fund as a lump sum under the proposed changes from April 2015 (providing you are aged 55 and above), only 25% of this is tax free – the remaining 75% of the fund will be taxed at your marginal rate.
For people who are higher rate taxpayers, or would become higher rate taxpayers by taking their pension fund, this will have a major impact. Taking your pension fund in annual amounts to maximise your tax efficiency can overcome this, but requires planning.
Secondly, a pension fund has major tax advantages – apart from some tax on dividends with the fund, growth on assets held within a pension is largely tax free. Therefore taking money out of a tax advantaged pension fund, just to sit in a taxed fund or taxed bank account, doesn’t make an awful lot of sense.