Quick Guide to the New Pensions Landscape

July 21, 2014 Ros Altmann Comments 1 comment

The table below summarises the changes confirmed today, what the system was like before the Budget, how it

works in the interim period up to April 2015 and what is planned when the full flexibility starts next April:

Policy	Before Budget	Interim changes up to April 2015	Full flexibility from April 2015
AGE: when you can access your pension fund	Age 55	Age 55	Age 55 – rising to age 57 from 2028
WITHDRAWING SOME MONEY: The rules on taking some money out of your pension fund from age 55	If you took any money at all out of your fund, you had to ‘secure an income’ within 6 months i.e. buy an annuity or drawdown policy, otherwise you faced 55% tax	You only need to ‘secure an income’ within 18 months, so technically don’t need to annuitise (though providers aren’t allowing it!)	No requirement to secure an income i.e. nobody forced to buy an annuity, can choose how much to take each year
CAPPED DRAWDOWN RULES	Annual income taken out of your fund cannot be more than 120% of standard annuity (GAD) rate. Any income above that is taxed at 55%	Annual income withdrawn cannot be more than 150% of standard annuity (GAD) rate. Any income above that is taxed at 55%	No cap on income, all withdrawals taxed at marginal rate. Existing capped drawdown policies protected and if withdrawals don’t exceed 150% of GAD rate, retain full £40,000 Annual Allowance for future contributions
TAX ON DRAWDOWN FUNDS INHERITED:	55% tax deducted from drawdown funds passing on to beneficiaries unless taken as a pension	No interim changes	Tax rate will be lower than 55%. Exact details to be announced in Autumn Statement 2014
CASHING-IN SMALL FUNDS: The rules on cashing in small pension funds as a lump sum from age 55 ( ‘trivial commutation’)	Can only cash in and take small funds as a lump sum if: – your total pensions are worth <£18,000 – or you can cash 2 funds worth up to £2,000.	Can cash in and take small funds as a lump sum if: – your total pension savings are worth <£30,000 – 3 funds up to £10,000 each	Any size pension fund can be taken as cash flexibly, whenever you want after age 55 subject to marginal tax rates
CASHING-IN LARGE FUNDS FLEXIBLY: Rules on cashing-in large pension funds as a lump sum from age 55 (‘flexible drawdown’)	Those with large pension funds can access their money flexibly in flexible drawdown and cash in if they wish as long you already have minimum lifelong pension income of £20,000	You can cash in your fund if: – you already have minimum lifelong pension income of £12,000	Any size pension fund can be taken as cash flexibly, whenever you want after age 55 subject to marginal tax rates
TAX AVOIDANCE PROTECTION: The rules on contributing to future pensions once you have taken as much money as you want from your pension fund	Once you have used flexible drawdown to access your pension savings, no further pension contributions are allowed (£0 annual allowance) – in order to prevent tax avoidance of large ongoing pension contributions	Minimum lifetime pension £12,000pa No further pension contributions (£0 annual allowance)	No minimum pension income required – all drawdown is flexible. Allow extra pension contributions – £10,000 annual allowance [BUT can retain full Annual Allowance if cash in 3 pots up to £10,000 each or unlimited small occupational pots]
ANNUITY DESIGN: The rules for annuities – what limits on product design?	Inflexible. Income must remain same or increase every year, never fall. Maximum 10-year guarantee for ongoing income after death. Money-back guarantee (value protection) is available but funds inherited on death are taxed at 55%. Can’t take lump sums if need to pay for care.	No interim changes	Will allow variable income stream. Will allow lump sum payments up to £30,000 (if specified at time of purchase). 10-year maximum guarantee removed, unlimited guarantees to allow more fund to pass on at death. Funds up to £30,000 can be paid as lump sum rather than ongoing income
ANNUITY SALES: Rules governing sale of annuities and information given to customers before pension fund converted to income	No requirement for suitability checks before annuity sales. No control on value for money or commission deducted at sale. Pension providers must send information on pension fund (‘wake up pack’) around 4-6 months before pension age and again 6 weeks before and must offer an annuity. Must inform of ‘open market option’ but no requirement to check suitability or warn of risks.	Still no requirements for suitability checks, providers must inform of open market option	Providers will have to provide standard information for customers to use in Guidance session. Will have to inform customers of how to access the free Guidance – this applies to each pension pot. May lead to ‘Pensions I.D.’ card or ‘Passport’ and eventually hope to have commonality for multiple funds all in same format
GUIDANCE AT RETIREMENT:	No actual personalised guidance offered at retirement. No personal information taken into account when communicating with customers other than age and pension fund size. Relevant questions on health, other options not asked	Still no guidance	Guidance Guarantee starts April 2015. Free, impartial, tailored guidance to go through options, warn of tax implications, signpost to more information or professional advice. Guides must not have connection with products or providers. Will not be FCA regulated but will be authorised and approved by Treasury. Funded by levy on all financial providers
TRANSFERRING DC PENSION FUNDS:	You have the right to transfer to another provider up to one year before pension age	No interim changes	You can transfer at any time, including at pension age if desired (to ensure everyone can take advantage of flexible access)
DB TO DC TRANSFERS: Transfer from DB (final salary-type) schemes to DC schemes	Transfers permitted for non-pensioner members. Taking advice before transfer is only an actual requirement if transfer instigated by the employer. Trustees have power to delay timing of transfer and to reduce value to reflect scheme under-funding but many may not be fully aware of this power	No interim change	All funded DB scheme non-pensioner members will be allowed to transfer to DC. Safeguards strengthened so every member must have independent advice from an FCA-regulated adviser before transfer a pension worth over £30,000. Guidance for trustees strengthened to ensure they know they can delay timing and reduce transfer values to reflect scheme funding level. Unfunded public sector schemes (e.g. NHS, teachers, civil servants) will not allow transfers except in exceptional circumstances but funded public schemes (i.e. local authorities and MPs)will allow transfers
FUNDING SOCIAL CARE:	No incentives to save for social care. Capital in pension funds or drawdown ignored for purposes of means-test, use a notional income, but no encouragement to set aside pensions or other savings for care	No interim change	No new incentives to save for social care, however money that remains in pension fund without being annuitized could be used if required. The Guidance must explain issues of social care funding to increase awareness and discourage withdrawals