Gain more control over when and how you can use your retirement savings
A practical consequence of living longer is that retirement lasts longer. Pensions have to stretch further. Pension legislation is always on the move but keeping up to date with the latest changes could open up new opportunities for you in retirement. In April 2011, some of the most significant changes in pension legislation for five years were announced. Some of these changes have created the very appealing prospect, for people aged 55 and over, of gaining much more control over when and how they can use their retirement savings.
Leave your pension invested for longer
As a consequence of calls for more flexibility, for example, the Government has done away with the ‘age 75’ rule that effectively obliged anyone with private pension savings to use them to buy an annuity at that age. This change means that you can now, if you wish, leave your pension invested for longer. And if you want to take an income from it at the same time (known as ‘drawdown’), the ways in which you can do this have also been made more flexible.
Meeting certain eligibility criteria
For example, under the current rules, if you meet certain eligibility criteria, you can now take as much as you want from your pension without the maximum income restrictions that apply to conventional drawdown arrangements. To be eligible for this facility – known as ‘flexible drawdown’ – you have to show that you already have a minimum ‘secure pension income’ of £20,000.
While for many people, buying an annuity is likely to remain the most appropriate method of accessing their pension income, some will want to take advantage of these enhanced drawdown facilities.
Optimise your tax liabilities
Flexible drawdown could, for example, be used to meet one-off large expenditure items as they arise or to optimise your tax liabilities. It can be a way to pass money through the generations, either by ‘gifting’ regular payments, for example into trusts, or as pension contributions to children using ‘normal expenditure’ rules so as to help avoid inheritance tax.
In moving money out of your pension fund before you die, you will be paying income tax on such payments but at a rate that is lower than the 55 per cent tax charge payable on a lump sum payment from your pension fund when you die.
Age-restricted benefit removed
Another age-restricted benefit where the rules have been eased is the opportunity to take tax-free cash – typically a quarter of your pension pot – when you first start to take your pension benefits. Until April 2011, if you hadn’t taken your tax-free cash by age 75, you lost the chance to do so. Now that restriction is removed too.
Depending on your circumstances, all these changes may well sound like good news, but there’s one important thing to be aware of. Just because the rules about when and how you take pension benefits have changed, it doesn’t mean your pension contract will have changed as well.
Reflecting the new legislation
If the terms of your contract have not been updated to reflect the new legislation, you could find that you can’t take advantage of them. You could still find yourself obliged to buy an annuity at age 75. And if you haven’t taken your tax-free lump sum at that age, you could still lose the opportunity to do so.
To make sure you can benefit from the current rules, you may need to transfer your pension savings to a provider who is offering these more flexible options. You could do this even if you are already taking drawdown income.
Planning can help save you tax
We can also review other important aspects of your pension arrangements and identify ways in which you can reduce your tax liability. As mentioned previously, if you have already taken tax-free cash from your fund but not yet taken any income from it, the tax that applies to the remainder of your pension if paid as a lump sum when you die – at any age – is now 55 per cent. It used to be limited to 35 per cent for pension holders dying before the age of 75, with up to 82 per cent applicable on death after this age. The April 2011 rules means that a standard rate now applies whatever the age at death.
Levels and bases of and reliefs from taxation are subject to legislative change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. Pension drawdown can leave your funds open to investment risk and is not suitable for everyone.