During the recent Budget the Chancellor, George Osborne, announced various wholesale changes to the way that investors may ultimately draw benefits from defined contribution pension arrangements such as personal pensions. For those reaching retirement between now and April 2015, these changes may have thrown any original planning into a state of flux. Whilst additional flexibility can only be a good thing when it comes to the relatively complex world of pensions, with increased choice come further complications.
In broad terms, those affected have three options:
– Either to take benefits now, via an annuity or income drawdown
– Take benefits under triviality rules
– Defer all benefits
Historically, a significant number of people have typically used their accumulated pension funds to purchase an annuity, effectively swapping their fund for a secure income for the remainder of their lifetime. Those fortunate enough to have larger pots may have chosen to enter into income drawdown, whereby they draw an income directly from their fund (which remains invested), thereby benefitting from potential investment gains (or losses). Some may possibly consider a combination of the two approaches, using the former to lock-in a â€˜base levelâ€™ of income, with the latter being used to offer the potential of greater returns and future benefits (albeit with restrictions and rules determining the extent of the benefits that may be taken). With either route, there is the potential to receive a tax free lump sum of up to 25% of the total value at that time.
In simple terms, people can take individual â€˜potsâ€™ of up to Â£30,000 as a lump sum, with a further three pots of up to Â£10,000 apiece also able to be taken as such. In either event, 25% of the proceeds are tax free, with the balance subject to tax at the individualâ€™s highest marginal rate.
Some people may choose to defer taking benefits (either some or all) until after April 2015, in order to have a clearer idea of any alternative solutions that may be available beyond this time.
Whilst the proposed changes will provide a far greater level of flexibility and choice, with that comes the requirement to fully consider the implications for your own particular circumstances. Drawing the entire sum at the first opportunity, paying the associated tax and then simply placing the resulting proceeds into a cash deposit account, would clearly not be sensible for most people, nor would taking no action at all.
Should you be approaching your potential retirement date or simply wish to discuss your available options in the light of the proposed changes, please contact Peter Brydon at Cave & Sons on 01604 621421 or by email at firstname.lastname@example.org
Cave & Sons Ltd is authorised and regulated by the Financial Conduct Authority. Financial Services Register number 143715