Radical and pensions are not normally two words you’ll find sitting together often but last week’s budget statement certainly put paid to that.
Referred to by many financial commentators as the biggest changes to pensions in over fifty years, it has certainly been the biggest series of announcements from a budget I can remember in 20 odd years in this industry.
And yes, I can affirm, this is nothing short of a Pension Revolution.
So what has changed—what does it all mean and how will it affect you?
The biggest news was undoubtedly the plans to allow pensioners to access their full pension fund from 2015.
This is a radical overhaul which means the necessity to purchase an annuity or access drawdown restricted by GAD rates has effectively been removed.
The GAD limit (the maximum amount of income that can be taken each year) will also be increased to 150% from 120%.
This means in practice is if you have a fund of say 100k then you would still be able to access your tax free cash of 25k but if you wish, can also take the rest of your pension as a lump sum subject to taxation at your marginal rate.
However, this does not mean annuities are a thing of the past.
Annuities will still play a key role post Budget 2014 as prior to it, especially for clients simply wanting the peace of mind which comes from having a secure, guaranteed income being paid to them each month of their retirement, and on until death.
Note…
The ability to take all your pension as a lump sum in one go will not be suitable for everyone and the options should be considered carefully.
Whilst this may be suitable for many clients, there is an obvious risk that funds can be used up very quickly, and a degree of responsibility and planning will be required to ensure that sufficient funds remain available in later life.
Remember there are tax planning issues to consider as well and this is not part of pension law yet as it is still in consultation.
If you are currently in the process of receiving annuity advice it may be wise to delay the process till April 2015 if that option is available to you.
It should also be noted that the minimum age for accessing your pension is going to be increased from 2018 to 57 from the current age of 55.
Trivial Commutation
The rules around trivial commutation have also changed.
Trivial commutation is where anyone who has private pensions with a value of 30k and does not have any other pensions will be able to take this as a partially taxable lump sum.
This will only apply to those taking triviality for the first time.
This is a very positive move and is a big jump from the current limit of 18k.
Furthermore the rules around small (or stranded) pension pots have also been changed. The current limit of 2k has been increased to 10k with people now able to take 30k from stranded pots and an addition 30k from triviality from age 60.
A lot of these measures were quite obviously brought in to combat the rise in the so called pension liberation schemes which are the cause of so much concern just now.
The final major change relates to flexible drawdown which is another way of taking your pension and potentially accessing more in lump sums.
As of 27 March 2014 the minimum income in retirement reduced from 20k to 12k meaning that individuals will no longer have to secure such a high level of guaranteed income before being allowed to consider this option.
The pensions and retirement landscape is going to be changed forever because of the changes George Osborne brought in by the 2014 Coalition Budget.
The implications for the industry are truly vast. Ensuring pensioners have enough to sustain them in retirement presents moral responsibility which advisers such as myself will take very seriously.
If you need help understanding these huge pension drawdown changes, or whether you should still buy an annuity, please call me. And remember, your first session with me is 100% free.
Call FREE from a landline: 0800 321 3508
Or direct to my mobile : 07803 508187
William George has been a Financial Advisor since 1993. From Dunfermline, Fife in Scotland, he services clients across UK, as well as expats from as far afield as New Zealand. He also has appeared on BBC Radio Scotland discussing investing and specialises in helping people with Retirement Planning and Pension Advice. Google+
