Elson Geaves Accountancy | Pensions
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Pensions

Pensions

Pension contributions (Table B)

 

As announced last year, the limits on tax-advantaged pension reliefs will be lowered on 6 April 2014. The cap on annual pension inputs will fall from £50,000 to £40,000. A member of a pension scheme who has had inputs below their limit in the three years before the change will be able to use the shortfall below £50,000 (not £40,000) to justify higher inputs in 2014/15.

 

The limit on the value of a tax-advantaged pension fund falls from £1.5m to £1.25m for those taking benefits from 6 April 2014. Anyone with a larger fund taking benefits after that date will suffer an income tax charge on the excess at 55%. People adversely affected – because they have funds on which they have not drawn their benefits which will take them over £1.25m when they do so – can apply for ‘protection’ to reduce the impact of the 55% charge.

 

Flexible pension benefits – March 2014

 

The most striking section of the Budget speech concerned the rules for people in defined contribution pension schemes. Traditionally, members of such schemes have been required to use their accumulated fund to buy an annuity by the age of 75. This has become increasingly unpopular as annuity rates have fallen. The rules were relaxed some years ago to allow ‘drawdown’ instead of an annuity – the fund is still identifiable, and the pensioner receives an income based on the returns on that fund, rather than an amount that has been contractually fixed with the pension company. These rules are now being relaxed further with effect from 27 March 2014:

 

  • drawdown is generally capped at 120% of an equivalent annuity on the pensioner’s fund (calculated using a published government rate) – this will be increased to 150% of the equivalent annuity;
  • where a person has a contractual right to income (usually an annuity or existing pension) of £20,000pa, they can draw as much as they like from another pension fund (‘flexible drawdown’) subject to income tax on the amount withdrawn – this requirement will be reduced to £12,000pa;
  • it will become easier to commute small pension pots to a lump sum payable immediately.

 

These are very welcome changes, but anyone affected should consider taking advice on the best course of action in their own circumstances.

 

Flexible pension benefits – 2015

 

Even more striking is the proposal for further flexibility to be introduced in April 2015. From that date, it is proposed that those eligible to take pension benefits from defined contribution funds will be able to draw any amount they like. The Chancellor confirmed that there is no intention to remove the right to draw 25% of the fund tax-free, but further amounts will be charged to income tax at the pensioner’s marginal rate. The government will consult over the next year on the best way to implement this new flexibility.

 

This is again very welcome: it will allow people access to the money they have saved up, and remove the need to suffer unattractive annuity rates. It is notable that the Budget predictions include an expectation that this will raise a significant amount of revenue for the Treasury: instead of being unable to draw more than an annuity, savers are expected to want to pay the tax in order to be able to spend their funds. The government may yet consider it necessary to introduce some limits to prevent people cashing in all their savings and leaving themselves dependent on state benefits.