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Retirement Planning – Pensions looking more attractive

The new pensions access regime allows savers more control over their own retirement funds.

Following the March Budget and the Chancellor’s subsequent announcements regarding the greater freedom he proposes to give individuals in relation to their own pension funds, the government has now set out its initial proposals on how they see the future landscape taking shape.

The most significant of these proposals is the introduction of a new drawdown regime. Drawdown is traditionally a method by which individuals can access the tax free lump sum that they are entitled to from their pension (which in most cases amounts to 25% of the fund). It also permits them to draw an ongoing income (usually subject to maximum percentages of the fund value) whilst the remaining fund continues to be invested on the policy holder’s behalf.

From April 2015, any restrictions around the amount of income which can be taken from drawdown will be removed and the investor will be able to draw any amount of income from the plan. This means that if appropriate, the whole of the fund could be taken in one payment, with 25% of the fund being paid free of tax and the residual 75% being taxed at the individual’s marginal rate of Income Tax.

The second key proposal is the removal of the 55% lump sum death charge which is currently levied on the pension pot when the investor dies either having reached age 75 or whilst holding monies in a drawdown arrangement. From April 2015, no tax will be payable if an investor dies before age 75 whilst holding a drawdown policy. If the investor dies after age 75, their beneficiaries will face tax at their marginal rates of Income Tax on payments from the inherited plan. This second point is due to take effect from 2016/17 with transitional arrangements to be put in place in the interim.

There have also been some important changes relating to maximum annual pension contributions. The current maximum is £40,000 but this will be reduced to £10,000 for those with new drawdown arrangements from which an income is being taken.

Other changes include the removal of the trivial commutation lump sum rules. This is where individuals with pension savings of less than a specified amount (currently £30,000) are able to take their pensions as a one-off lump sum. This will become redundant as the new flexibility will make this possible for any sized fund.

These, along with other changes will be confirmed with the publication of the Taxation of Pensions Bill which will be introduced this autumn.



Date: 17th October, 2014
Author: Michael Lapham


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