The Chancellor surprised us all by freeing up people’s pension pots to allow unlimited access in retirement. This unprecedented level of flexibility will be attractive to both savers and those already in drawdown.
If you have been thinking about using Flexible Drawdown you may wish to revisit those plans.
Greater flexibility from 27 March 2014
From 27 March 2014, the maximum annual amount that can be taken from a drawdown fund will increase by a quarter to 150% of the annuity rate. This increase will apply to drawdown years starting on or after 27 March 2014.
At the same time, Flexible Drawdown will be available to those with just £12,000 of secure pension income rather than the current £20,000. Some people could qualify just by State Pension alone, though this may all be academic given the planned changes from 6 April 2015.
Unprecedented flexibility from 6 April 2015
The big news, though, is that there will be no cap on income for anyone in drawdown from 6 April 2015. The income drawn is still subject to income tax, so this may limit the amount people decide to draw under the new rules, for example to avoid moving to a higher tax band.
This unlimited access will be exciting for many and will allow, for the first time, those in ill-health to draw a level of pension income that reflects their reduced life expectancy. It also means that those with drawdown funds which earn more than they are allowed to draw annually will no longer have to suffer the frustration of seeing their pension fund grow each year without being able to spend it.
This is also a big step towards simplification of drawdown and lower costs. No compulsory pension reviews and no additional complications of multiple review dates will make costs much lower.
The 55% tax rate on lump sum death benefits will be reviewed to make sure taxation of pension wealth remains fair.
Those with pension savings under £30,000 in total will, subject to certain criteria, have free access to their pension funds from 27 March 2014. 25% will be available tax-free and the rest subject to income tax.
The government plan to link the minimum age that you can normally access pension, currently age 55, to the State Pension Age. This means the earliest age to access pensions other than due to ill-health or other limited circumstances will increase to age 57 in 2028.
Transfers from public sector defined benefit schemes to defined contribution schemes will no longer be allowed, other than in exceptional circumstances. The change is expected from April 2015. A consultation has opened to discuss restrictions on private sector pension plans.
The Chancellor has hinted that the tax relief system on contributions is not under review and that there are no changes planned to pension commencement lump sums. This may, of course, all change with a new government.