Pension Freedom

£ locked in IceThe most radical reforms this century

In Budget 2014, Chancellor George Osborne promised greater pension freedom from April next year. People will be able to access as much or as little of their defined contribution pension as they want and pass on their hard-earned pensions to their families tax-free.

For some people, an annuity may still be the right option, whereas others might want to take their whole tax-free lump sum and convert the rest to drawdown.

Extended choices

‘We’ve extended the choices even further by offering people the option of taking a number of smaller lump sums, instead of one single big lump sum,’ Mr Osborne said.

From 6 April 2015, people will be allowed full freedom to access their pension savings at retirement. Pension Freedom Day, as it has been named, is the day that savers can access their pension savings when they want. Each time they do, 25% of what they take out will be tax-free.

Free to choose

Mr Osborne said, ‘People who have worked hard and saved all their lives should be free to choose what they do with their money, and that freedom is central to our long-term economic plan.’

From 6 April 2015, people aged 55 and over can access all or some of their pension without any of the tax restrictions that currently apply. The pension company can choose to offer this freedom to access money, but it does not have to do so.

Accessing money

It will be important to obtain professional advice to ensure that you access your money safely, without unnecessary costs and a potential tax bill.

Generally, most companies will allow you to take the full amount out in one go. You can access the first 25% of your pension fund tax-free. The remainder is added to your income for the year, to be taxed at your marginal income tax rate.

This means a non–tax payer could pay 20% or even 40% tax on some of their withdrawal, and basic rate taxpayers might easily slip into a higher rate tax band. For those earning closer to £100,000, they could lose their personal allowance and be subject to a 60% marginal tax charge.

Potential tax bill

If appropriate, it may be more tax-efficient to withdraw the money over a number of years to minimise a potential tax bill. If your pension provider is uncooperative because the contract does not permit this facility, you may want to consider moving pension providers.

You need to prepare and start early to assess your own financial situation. Some providers may take months to process pension transfers, so you’ll need time to do your research.

Questions to ask

It’s important to ask yourself some pertinent questions. Are there any penalties for taking the money early? Are these worth paying for or can they be avoided by waiting? Are there any special benefits such as a higher tax-free cash entitlement or guaranteed annuity rates that would be worth keeping?

If you decide, after receiving professional advice, that moving providers is the right thing to do, then we can help you search the market for a provider who will allow flexible access.

Importantly, it’s not all about the process. You also need to think about the end results.

Withdrawing money

What do you want to do with the money once you’ve withdrawn it? You may have earmarked some to spend on a treat, but most people want to keep the money saved for their retirement. Paying off debt is usually a good idea.

If you plan just to put the money in the bank, you must remember you will be taxed on the interest. With returns on cash at paltry levels, you might be better keeping it in a pension until you need to spend it. Furthermore, this may also save on inheritance tax.

Finally, expect queues in April 2015. There’s likely to be a backlog of people who’ve put off doing anything with their pension monies since last year. Those who get through the process quickly and efficiently will be the ones who’ve done the groundwork.

For retirement advice call Jeremy on 01554 770022 or 07989 599423 or use the Contact form:

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.
A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

Autumn statement 2012

TaxOn 5th December 2012, George Osborne gave his 2012 Autumn Statement to Parliament. The proposals are as follows:

FUEL

  • The 3p increase in fuel duty, planned for next January, is cancelled.

BENEFITS AND PENSIONS

  • From 2014/2015 lifetime allowance to fall from £1.5m to £1.25m.
  • From 2014/2015 annual allowance to fall from £50,000 pa to £40,000 pa.
  • Legislation will be introduced in Finance Bill 2013 to make these changes and will be published in draft on 11 December 2012. The Government also announced that they will discuss with interested parties whether to offer a personalised protection regime in addition to a fixed protection regime.
  • Maximum Government Actuary’s Department rate (GAD) to rise from 100% to 120%.

STATE BENEFITS

  • Basic state pension to rise by 2.5% next year to £110.15 a week.Most working-age benefits to rise by 1% for each of next three years.
  • Child benefit to rise by 1% for two years from April 2014.
  • Local housing allowance rates to rise in line with existing policy next April but increases in the following two years capped at 1%.
  • Changes to welfare to save £3.7bn by 2015/16.

TAXES AND ALLOWANCES

  • Basic income tax threshold to be raised by £235 more than previously announced next year, to £9,440.
  • Threshold for 40% rate of income tax to rise by 1% in 2014 and 2015, from £41,450 to £41,865 and then £42,285.
  • Main rate of corporation tax to be cut by extra 1% to 21% from April 2014.
  • Inheritance tax threshold to be increased by 1% next year.
  • Bank levy rate to be increased to 0.130% next year.
  • £5bn over six years expected from treaty with Switzerland to deal with undisclosed bank accounts.
  • HM Revenue and Customs budget will not be cut.
  • ISA contribution limit to be raised to £11,520 from next April.
  • No new tax on property value.
  • No net rise in taxes in Autumn Statement.

ECONOMIC GROWTH

  • Predicted to be -0.1% in 2012, down from 0.8% predicted in the Budget.
  • Forecasts for next few years are: 1.2% in 2013, 2% in 2014, 2.3% 2015, 2.7% in 2016 and 2.8% in 2017.

GOVERNMENT BORROWING/SPENDING

  • Point at which debt predicted to begin falling delayed by a year to 2016/17.
  • Deficit is forecast to fall this year, as is cash borrowing.
  • Deficit to fall from 7.9% to 6.9% of GDP this year, and to continue falling to 1.6% by 2017/18.
  • Borrowing forecast to fall from £108bn this year to £31bn in 2017/18.
  • £33bn saving to be made on interest debt payment predicted two years ago.
  • Deficit fallen by a quarter in last two years.
  • Government spending as share of GDP predicted to fall from 48% in 2009/10 to 39.5% in 2017/18.
  • Spending review to take place in first half of next year.
  • Departments to reduce spending by 1% next year and 2% year after.

JOBS AND TRAINING

  • Unemployment expected to peak at 8.3%.
  • Employment set to rise in each year of the parliament.

TRANSPORT

  • Extra £1bn to roads, including upgrading A1, A30, and M25.
  • £1bn loan to extend London’s Northern Line to Battersea.

EDUCATION AND FAMILIES

  • £1bn to improve good schools and build 100 new free schools and academies.
  • £270m for further education colleges.

INFRASTRUCTURE

  • Ultra-fast broadband expansion in 12 cities.
  • £600m for scientific research.
  • Annual infrastructure investment now £33bn.
  • £1bn extra capital for Business Bank.
  • Gas Strategy to include consultation on incentives for shale gas.

OVERSEAS AID

Promise to spend 0.7% on development to be honoured next year, but not exceeded.

Thank you to the Compliance Services of SimplyBiz plc for putting together this summary of the Autumn statement 2012

If you need advice on the changes and how they may affect you, please give me a call on 01554 770022, and I will explain how I may be able to offer professional independent financial advice.