Potted future

ension changes were kept closely guarded until the day of the Budget and came as a shock to financial advisers. The new proposals rip up the rule book and reverse decades of government policy by ‘unlocking’ pensions for everyone age 55 and over.

Historically, most pension funds had to provide lifelong income, not lump sums, from at least
three-quarters of the money. More recently, ‘flexible drawdown’ enabled funds to be taken as a lump sum, but only for people who already had the separate safety net of a guaranteed pension income of
£12,000 (changed in the budget from £20,000).

From April 2015, it is proposed that everyone, whatever their other income, will be able to take their pension money any way they want, including as a lump sum.

Even with this big change, some basics stay the same. The minimum age for pension access is still 55: they remain completely locked away until then. The government has confirmed that there are no plans to alter the current 25 per cent tax-free cash lump sum element. Also, of course, the other 75 per cent is still subject to income tax in the normal way.

There were also some interim changes that will benefit many people immediately:

• The ‘triviality’ rules and ‘small pot’ rules already allow lump-sum access for very small plans (although these are only available from 60, not 55). Under triviality rules, people with pensions worth under £30,000 in total (increased from £18,000) can withdraw the money in one go. Under the small-pots rule, up to three pension pots worth less that £10,000 individually (previously £2,000) can be taken in this way.

• Until the limits are effectively removed next year, those people drawing down from their pension fund without the freedom given by having the minimum guaranteed income (i.e. who are taking capped drawdown), have seen their maximum withdrawal increased by a quarter.

Putting aside the much-publicised issues about people blowing their pension pots on Lamborghinis, the new proposals are not yet written into law. When new financial rules seem almost too good to be true, it’s worth expecting that some tax ‘anti-avoidance measures’ may yet be added.

Save thousands

Non-earners over 60 (or over 55 from April 2015) can take advantage of the new rules by paying £2,880 into a pension. With added tax relief, this becomes £3,600, which they can immediately take as a lump sum. Provided that the 75 per cent ‘income’ element is within their personal tax allowance, they would be receiving an almost instant £720 tax-free profit. Basic-rate taxpayers can also benefit.

Subject to sufficient earnings, an £8,000 pension contribution becomes £10,000 with tax relief. This fund can be then taken as a lump sum under the small pots rules and, provided that the 75 per cent ‘income’ element of this remains within the basic rate tax band, they would receive £8,500 back giving them a £500 tax free profit.

However, higher rate tax payers can benefit
the most – particularly those that expect to be in lower tax band in the future, or who can redirect their business profits into spousal pension contributions. Below are some examples based on a one-off £40,000 gross contribution (subject to sufficient earnings).

The key drawback of pensions has always been: that money is locked away. With that restriction
being scrapped (subject, of course, to the new proposals being introduced), it may now be time to review your own and your clients’ pension strategies to avoid missing out on the opportunities to save literally thousands in tax.

Scott Gallacher is a director at Rowley Turton

He writes the regular IFA comment in Private Client Adviser