How the current system works
Currently people do not have full access to their pension at retirement which must remain in the pension regime although they do not need to buy an annuity. Taking the whole pension fund would incur a 55% tax charge.
However, from April 2015 for people taking their benefits from a defined contribution pension, such as a stakeholder or personal pension, after age 55 and deciding to do so as a lump sum, the tax charge will be their marginal rate . This means the tax they pay will be either 0%, 20%, 40% or 45% for that tax year.
The current options allow you to take your 25% tax free lump sum and are as follows:
|
For small pots of £2,000 or less you can take this as a lump sum if you are aged 60 or over. |
|
|
If the overall value of your pensions are under £18,000 the trivial commutation rules allow you can take them all as a lump sum. |
|
|
For funds larger than £18,000 about 75% of people buy a pension annuity which involves exchanging their fund for a guaranteed income for their lifetime. |
|
|
An alternative to annuities is capped drawdown either as an invested or fixed term plan where an income of up to 120% of an annuity could be paid allowing full flexibility for future options. |
|
|
Where there is a guaranteed income of £20,000 a fund in flexible drawdown can be used to to draw any income which is taxed at your marginal rate. |
|
|
Changes from 27 March 2014
There will be some immediate changes in March this year with greater freedom to access your pension funds allowing you to take you to take your 25% tax free lump sum:
|
Increase the amount for small pots from £2,000 to £10,000 and the number of posts that can be taken from two to three irrespective of total pension value. |
|
|
|
Increase the trivial commutation amount that can be taken as a lump sum from £18,000 to £30,000. |
|
|
|
For capped drawdown and fixed term plans the limit for withdrawal will be increased from 120% to 150% of an annuity. |
|
|
|
For flexible drawdown the level of guaranteed income required will be reduced from £20,000 to £12,000. |
There was a negative reaction in the equity markets to insurance companies with Legal & General shares lower by 14%, Partnership lower by 56% and Just retirement down by 42%.
|