2014 Budget: your top ten questions to us - answeredWhen George Osborne stood up and said he had good news for savers in his budget he wasn't kidding! We now have pensions appearing on the front pages of all the national newspapers - and for all the right reasons. And with changes to ISA limits and the starting rate of income tax it is a huge boost to long term savings.
The changes announced on Wednesday have created plenty of interest from advisers and customers alike. Our phones have been ringing off the hook:
Pension changes from 6 April 2015
The radical pension proposals for 2015 reflect the government's vision for a more flexible regime giving clients more choice, control and responsibility over how they access their pension savings. But nothing is set in stone yet and, as always, the devil will be in the detail of the forthcoming consultations.
1. Will it really be possible to take unlimited income from any DC scheme after 6 April 2015?
From 6 April 2015, the government intends to remove all retirement income limits for DC pensions. Effectively, everyone retiring with a DC pension pot will have access to flexible drawdown - without having to satisfy any 'minimum income requirement' or give up on future pension saving. This gives much more scope for innovative 'at retirement' financial planning tailored to client needs.
There will, however, be circumstances where the new flexibility isn't available:
- Existing annuities or scheme pensions:Those who have locked into a lifetime income using annuities, or scheme pensions, can't undo them. This means many existing pensioners won't have access to the new flexible income options.
- Defined benefit pensions: The new income flexibility won't be available for DB pensions. We're hopeful, however, that they will be available for DC pots held within DB/ mixed benefit schemes (such as AVC pots).
- Scheme/ product restrictions: There's no obligation for every DC pension scheme or provider to offer the new flexibility. Some pension schemes may not have systems in place or scheme rules may not allow the new flexible income withdrawal. So it may be necessary to transfer benefits to a pension scheme that is able to facilitate this.
The future of transfers from DB to DC schemes is uncertain. Anyone looking to give up the guaranteed income from their DB scheme for the new found freedom in the DC world may need to act quickly before any legislation is introduced. But a DB scheme will still be right for a great number of pension savers and it is important they understand what they are giving up before transferring.
The proposals include introducing legislation to stop transfers from public sector DB schemes into a DC scheme. With public sector schemes unfunded this is an understandable attempt to stop money flowing out of the government coffers to those seeking greater flexibility.
There will be consultation to determine whether similar measures will be necessary to restrict transfers from private sector DB schemes. But unlike their public sector cousins, private sector DB schemes are pre-funded, so transfers don't create the same financial strain for the sponsor. Indeed, transfers can often be beneficial both to a scheme's funding position and the sponsor's balance sheet - as well as meeting the member's needs.
There are a broad range of suggested options for the private sector ranging from business as usual to half way measures which give the scheme trustees the power to decide whether to offer transfers or at the other end of the scale a ban in line with the public sector. It would be surprising, and disappointing, if the government chose to unduly restrict the options available to private sector sponsors of DB schemes.
3. At what rate will drawdown lump sum death benefits be taxed from 6 April 2015?
There are plans to cut the rate of tax payable on drawdown death benefits from April 2015 but as yet there's no suggestion as to what any new rate would be.
Having a rate of tax on death which is greater than the income tax on withdrawing income could see the tax tail wagging the retirement income dog, driving inappropriate client decisions. Therefore it would appear to make sense to have the death benefit charge aligned to the income tax rate.
The Government has recognised the need to have a tax system that supports pension savers and helps them take the right decisions for the best financial outcome for them and their loved ones.
This should see the ability to pass on pension death benefits to loved ones given a further boost and make the use of bypass trusts even more appealing.
4. Where did the government get the 55% charge if you take your pension as a lump sum?
This one has had many of you scratching your heads. It is actually the 55% unauthorised payment charge. This rule prevents providers from knowingly making an unauthorised payment - which includes paying a pension above the current limits. Of course in reality the provider would simply prohibit someone taking all their benefits as cash except for certain circumstances such as serious ill-health or triviality lump sums.
27 March 2014 pension changes
The government is making some temporary changes to give pension savers a bit more flexibility until the 2015 changes come into force. While these changes are not subject to consultation some of the fine detail will only be known once the Finance Bill is published on 27 March.
5. When can drawdown users access 150% GAD?
For existing drawdown users, the new, higher income limit will apply from the start of their next drawdown year after 26 March 2014. This is the anniversary date of when drawdown was originally started, so some drawdown users won't feel the benefit of the increased limit until March 2015. This seems anomalous when the limit is scheduled to be completely removed from April, so don't rule out further interim changes.
Anyone starting drawdown under an arrangement for the first time after 26 March will have immediate access to the 150% limit. Of course, this assumes the provider is geared up to do this.
6. Is it possible for clients with pensions worth more than £30,000 to get a lump sum using the new triviality relaxations?
Provided that benefits are taken in the correct order, and are structured in the right way, it will be possible to get lump sums of much more than £30,000 under the new triviality rules. But they still can't be used before 60.
This comes by combining the new 'stranded pot' and trivial lump sum rules.
- Any stranded pots below £10,000 would need to be taken before triviality on the main pots to get the maximum effect. The new stranded pot rules can be used for up to 3 personal pensions and unlimited occupational pensions.
- If total remaining pension rights, after eliminating any stranded pots, are worth less than £30,000 these can then be paid as a lump sum under the beefed up triviality rules
Some clients will want to rethink their decision in light of the radical changes proposed in the Budget. But, for many, the reasons that drove their original decision will remain valid. The new flexible income options won't be right for everyone.
The usual cancellation rights apply to recent annuity purchases. And many annuity providers have extended the cancellation period following the Budget.
Of course, annuity cancellation doesn't give an automatic right to reinstatement as a pre-retirement member. Some schemes, particularly occupational schemes, aren't able to do this. So cancelling with one provider may simply trigger an obligation to buy a replacement annuity with another - and there's no guarantee that the same terms will be available on the new purchase.
8. If contributions have been made before 30 June 2014 is it possible to pay a further £15,000 after 1 July?
Unfortunately this won't be the case. Any contributions made before 30 June 2014 will count towards the new £15,000. So someone paying the maximum £11,880 before 30 June 2014 will be able to make a further subscription of up to £3,120 after 1 July.
9. Will it be possible to contribute to different NISAs in the same tax year once the stocks and shares and cash definitions have merged?
Yes it will be possible to subscribe to a Cash NISA and a Stocks & Shares NISA in the same year, with separate providers, splitting the overall £15,000 allowance between the two in any proportion.
Changes to savings rate of tax
10. Will non-taxpayers be able get up to £15,500 in chargeable gains from their investment bonds tax free?
There was one further little nugget buried in the budget statement which could be pure gold for financial planners and offshore bonds in particular.
There was a double boost with the starting rate for savings income reduced from 10% to zero and the band almost doubling in size to £5,000. Savings income includes interest earned from deposit accounts, fixed interest securities and more importantly offshore bonds gains. This could see a non-taxpayer realise chargeable gains of up to £15,500 each year completely free of tax from April 2015.
But there are a couple of things to remember:
- Savings income comes after earned income in the tax pecking order. So if someone has earned income of more than £15,500 they won't benefit from starting rate tax on their savings income.
- Onshore bonds gains are deemed to have paid tax at basic rate so won't benefit.
Our team of technical experts has more than 300 years experience in the financial services industry. This experience, along with relevant qualifications, ensures we have the skills and knowledge to deliver this invaluable service to you.