Budget 2014: Rewriting the rules for pensions
The March 2014 Budget caught most people by surprise in respect of the extent of the pension changes that were announced. The Government is proposing radical reforms to the way in which individuals can take their defined contribution (DC) benefits from April 2015. The Government is still consulting on these proposed changes.
The Government has also put forward a number of immediate measures which came into effect from 27 March 2014.
Changes which came into effect on 27 March 2014
If you are aged 60 or over and have overall pension savings (across all your pension schemes, not just in the Telefonica UK Pension Plan) of less than £30,000 you may choose to take all of these benefits as a cash lump sum. This "trivial commutation" limit has been increased from £18,000 to £30,000.
Regardless of your total pension savings in other pension schemes, if you are aged 60 or over and have a pension pot of less than £10,000 in the Telefonica UK Pension Plan you could take this as a cash lump sum. This also applies to pots of less than £10,000 in any of your other pension schemes, providing your total pension savings are not more than £30,000. This "small pot" limit has been increased from £2,000 to £10,000.
If you have DC benefits in the Plan, instead of buying an annuity with your pension pot on retirement, you may choose to transfer your benefits out of the Plan to another pension arrangement so that you have more flexibility about the income you draw from your pension. If you choose to transfer out to a suitable arrangement, you currently have two options:
- Capped drawdown: The maximum amount you can withdraw from your pot each year has been increased from 120% to 150% of an equivalent annuity. This will impact those people who have already opted for capped drawdown.
- Uncapped (flexible) drawdown: If you already have a secure pension income of at least £12,000 a year (including any state pension) there is no limit on how much income you can draw from your pot each year (the threshold for "flexible drawdown" has been reduced from £20,000 to £12,000).
What is planned for April 2015?
Under the new system, it is proposed that everyone will have the flexibility to take their DC pension benefits from a minimum pension age (currently age 55) "whenever and however they wish", regardless of their total DC pension savings. This will mean that individuals can take their benefits as a cash lump sum, purchase an annuity or draw down their DC pension benefits as they see fit. Regardless of how pension benefits are taken, individuals will be taxed at their marginal rate (subject to the ability to take a 25% tax-free lump sum).
As there is more flexibility on retirement it will be much easier for people to run out of money in retirement. That's why the Government has also stated that the trustees and providers of DC pension schemes will have to provide each pension holder with free, impartial and face-to-face financial information around retirement choices. The Government stopped short on insisting that this is in the form of specialist financial advice.
What does this mean for you?
Right now, the key thing to recognise is that a lot of the details still have to be confirmed. There may be some major changes to the Government's plans before April 2015. It is essential for anyone who wants to make pension decisions this year to consider taking financial advice first. Annuity purchase may well still be the best option for those individuals who want security of income in retirement and who do not have significant other personal wealth.
Where can I get more information?
The Trustees and the Company will give updates on developments as they happen. However, both parties will be taking time to consider the full implications of the changes before announcing any changes to the Plan or Company arrangements. It is likely that the Insurance industry will come out with some new products and ways of making the changes work but that is unlikely to happen before the Autumn.
If you'd like to read more about these changes - either the ones that have already been made or the plans for 2015 - here is a website that may help: GOV.UK Budget 2014: support for savers