Pandora’s Pension Box is Opened
Pandora’s Pension Box is Opened06 March 2019 Written by James & George Collie

By Scott Middleton, Consultant

James & George Collie Financial Management Limited

pensionsWhen George Osborne stood at the Dispatch Box in the House of Commons to deliver his 2014 Budget speech there were very few people expecting him to announce anything of any real importance. However, by the time he was finished, he had ensured that Wednesday the 19th March will go down in history as the day in which pensions, and the way investors could take their benefits from them, changed forever.

The main announcements regarding the options for those with pension arrangements at retirement were split into two parts - the first were interim changes that were to be put in place immediately and the second were proposed changes that would be subject to a consultation process, but which are aimed to be implemented from April 2015.

Interim Rules

The temporary rules will run from 27 March, 2014 to 6 April, 2015 until the full proposed reforms come into force.

The first major change was in relation to the “triviality” rules regarding pensions. Previously, if you were aged over 60, had not touched your pension pot, and your total pension savings are no more than £18,000, you could withdraw all of the savings. This has increased to £30,000.

The first 25% of the money you take out is tax-free, and the rest is taxed as the top slice of your income in the tax year of withdrawal. To take some fictional examples: Clara is 62 and has no other income, but does have a £20,000 pension pot. She withdraws all £20,000 in one year. She receives £5,000 (25%) tax-free and pays no tax up to her personal allowance of £10,000. She pays 20% tax on the remaining £5,000.

In comparison, Denise's pension pot is also £20,000. She is still working, and earns £65,000 a year. She decides to empty her pension pot. Like Clara, the first £5,000 would be tax-free, but the balance of £15,000 is taxed at 40%, because she has already used all her basic rate tax band.

The second major change has come in relation to the way in which benefits are taken from “drawdown” arrangements. These are where income is taken directly from an individual’s pension fund on retirement, rather than the fund being used to purchase an annuity.

If you have a pension which is in "capped drawdown", so that you are taking some money out each year, the maximum amount available to withdraw from your drawdown fund will increase by 25%. This will provide a very welcome increase in potential income for some.

Alternatively, if you are in capped drawdown and have at least £12,000 a year of "secure pension income", including the state pension and annuities in payment, you can move to "flexible drawdown" which gives you complete freedom over how much you take out of the pension pot. Before 27 March you could only move to flexible drawdown if you had secure pension income of at least £20,000 a year.

Remember that any money you take out of your drawdown fund will be taxed at your marginal rate, so you may want to take the money out in stages so as to minimise the tax cost.

Proposed Rules

Whilst the interim rules announced would have been sensational news in their own right, it is the proposed changes that really caught the imagination of investors and advisers alike.

The government is consulting on the rules which will apply from 6 April, 2015, but it is expected that you will be able to take your entire pension savings as a lump sum and spend or invest it as you like, as long as you are over 55. Up to 25% of the money will be tax free, as now, and the balance will be subject to tax at your marginal rate.

For example, Emily is 60 and has taxable income of £50,000. She has £250,000 in her pension pot, and takes all this money out on 7 April, 2015. She will receive £62,500 without tax (25%) and the balance will be taxed at a mixture of 40% and 45%.

This freedom to do “what you like” with your pension is something that completely changes the manner in which pensions will be viewed in the future. The idea that money placed in a pension is “lost” to you, over and above the 25% tax free lump sum, is now redundant. Pensions can now be seen as a great, tax efficient way in which to save for retirement, but potentially for planned capital expenditure also.

Our advice at this time is that it is not only those coming up to retirement who should be reflecting on the impact of the proposed legislation on their pension plans, but ANY person eligible to pay into a pension arrangement should also be considering their options and looking to see how they might be able to utilise their pension to help meet current and future financial objectives.

As always our team of highly qualified and experienced IFAs are available to help and you can make an appointment for your initial consultation, at no cost to you but at our expense, by phoning us on 01224 581581, or by e-mailing This email address is being protected from spambots. You need JavaScript enabled to view it. .

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