It’s easy to understand why many of us put planning or reviewing our pensions on the back-burner. Faced with a near-constant stream of gloomy media stories ranging from the UK economy to the euro-meltdown, the best solution may seem to just to wait it out and hope for the best when it comes to retiring. The good news is that there are still some long-term pension planning opportunities that you could benefit from.
In April 2011, some of the most significant changes in pension legislation for five years were announced. Many of these changes were designed to limit what the government clearly sees as over-generous tax-relief concessions. But others have created the very appealing prospect, for people aged 55 or over, of gaining much more control over when and how they can use their retirement saving.
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 or take an income from their pension 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 in pension jargon as ‘drawdown’), the ways in which you can do this have also been made more flexible.
For example, under the new 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. That’s right. You could even take your entire pension pot in one go – although the income tax to be paid may well deter you!
To be eligible for this facility – known as ‘flexible drawdown’ – you have to show that you are already receiving a ‘secure pension income’ of at least £20,000 a year. This can include any State pension you are receiving
Whilst 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. If you are among them it could open up new tax planning avenues for you and your financial adviser.
Flexible drawdown could, for example, be used to meet large one off expenditure items as they arise or to optimise your tax liabilities. If you have no need for the income it can also 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, whereby any contributions must come from surplus income and not been seen to diminish savings or your standard of living, 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 hefty 55% tax charge payable on a lump sum payment from your pension fund when you die after age 75 or when your pension is paying an income.
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 necessarily mean your pension contract will have changed as well.
If the terms of your contract have not been updated to reflect the opportunities in 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.
To make sure you can benefit from the new rules, you need to check the rules of your existing pensions. If they do not offer the options that you need, it may be in your to transfer your pension savings to a provider who is offering these more flexible options. You can do this even if you are already taking drawdown income. If you have a financial adviser, they will be able to explain the pros and cons of such a decision.