The New Pension Rules
The changes to pensions made by George Osborne in his spring budget were radical. It does highlight one of the main problems with pensions, that the government can change the rules after you have committed your money. In this case the rule changes are beneficial. We have summarised them for your perusal:
- You can get retirement benefits out of your fund as now at 55, for current retirees, or earlier if you have ill health. These rules have not changed.
- You can get 25% of your pension as a tax free lump sum when you start taking your retirement benefits. These rules have not changed.
- You can then take what you want when you want, but it will form part of your taxable income. This is the big change, giving you complete flexibility over your savings (once you are 55). The down side is that if you take large amounts out you will end up paying higher rate tax on it.
- You can pay up to £40,000 a year into your pension scheme, and you can generally back date these payments for three years.
- Once you start drawing money out of your pension scheme the amount you can put in is restricted to £10,000.
- You do not need to buy an annuity.
What does this mean?
The two main down sides to pension saving have been swept away. The government no longer controls access to your funds, and you have no obligation to buy an annuity so you can leave your money to your heirs.
There’s also some interesting inheritance tax issues. The rules are different if you are 1) still accumulating your pension or 2) if you are either over 75 or taking your pension.
If you are still accumulating your pension when you die you can put a trust wrapper round your pension so it never forms part of your estate.
If you are taking your pension or are over 75 then the assets you leave become subject to income tax by your heirs. Remember you got income tax relief when you put the money in the pension scheme so it is fair that income tax is paid when the money comes out, but notice, inheritance tax has been completely avoided.
Overall I think these rules make investing through pensions much more attractive. The rules are complicated and you need to think through your personal circumstances, so please give us a call if you would like to discuss further.