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New Drawdown Pension Rules

In his budget statement on 19th March 2014 the Chancellor, George Osborne said “Pensioners will have complete freedom to draw down as much, or as little of their pension pot as they want, any time they want. No Caps, no drawdown limits”. But what does this mean ?

On this page we will simply explain what your options are, following this announcement. We will tell you what has changed and what hasn’t. If you prefer call us on 020 33 55 4827 and we will explain your options to you in person.


Things that haven’t changed

Despite the new announcement, the following rules will still apply to your pension :

  • You cannot legally access your pension fund before the age of 55

  • The first 25% of your pension pot can be paid to you as a tax free lump sum

  • The remaining 75% no matter how you take it (as single lump sum, or a series of lump sums or as a regular income) will be taxed as earned income.

The most important thing to remember with the Chancellor's proposed changes is that while the idea of taking a large lump sum may sound attractive, you could end up giving 40% of it (or more) back to the taxman. You may keep more of your money if you take smaller regular amounts over a number of tax years.

Final Salary schemes are not affected by the changes.


The Budget 2014 Pension Changes

It is important to understand that the changes come in two phases :

The first phase came into force on 27th March 2014 and will last until April 2015.

From April 2015 the first phase will no longer apply and the rules from April 2015 will apply to everybody.

The changes from April 2015 are, at this stage, only proposals and are not yet law. Later in 2014 the changes will be formulated into a Bill which will be put before the House of Commons. The bill is subject to change and revision. Until the changes have been passed by Government they should not be relied on.


Changes from 27 March 2014 – April 2015

The aim of the changes from 27 March 2014 is to prepare the way for the new regime and to loosen up some existing restrictions and limits to give pensioners more control over their pensions, until the new proposals become law.


1. GAD Income Increase

For people already in drawdown they are limited to how much they could take from their pension fund after the 25% tax free lump sum. This limit is known as GAD, which is a calculation of how much you can take from your pension fund based on your age and fund value.

The maximum you can take from the remaining 75% was originally set at 120% of the GAD limit. In other words if GAD said you could take £10,000 a year from your pension fund, then you could choose to take £12,000 from your pension (GAD X 120%).

The remaining 75% was previously intended to help create an income for life, therefore the aim of GAD is to create an income stream that has a good chance of running for many years, possibly for life, although this cannot be guaranteed.

During this interim phase the Government have increased GAD to 150%. From April 2015 it is proposed that no GAD limits will apply for new income drawdown customers.


2. Reduced Flexible Drawdown Limit

The Government previously introduced Flexible Drawdown for those customers who already had a good level of pension income which was guaranteed for life. Customers qualified for Flexible Drawdown if they met the Minimum Income Requirement (MIR) which was previously £20,000 per annum.

In such cases any pension fund which was not being used to provide the guaranteed pension income (MIR), could be taken however the customer wanted. Until April 2015 the MIR has been reduced to £12,000 per annum meaning more people can qualify for Flexible Drawdown.

Pensions that qualify towards the MIR are :

  • Personal Pension Annuities

  • Company Pensions

  • Scheme Pensions

  • All State Pensions

  • Dependants' Annuities, Company and Scheme Pensions

It is proposed that from April 2015 Flexible Drawdown will become redundant as everybody in drawdown will be able to use their fund as they wish.


If you are aged 60 or over

During the interim period there are further benefits for those aged 60 or over.


3. Small Pots of under £10,000

If you have any pension pot with a pension provider that is worth £10,000 or less then, irrespective of any other pension pots that you hold, you can take it all as a lump sum (at least 75% of it would be taxed as income).

You can release a maximum of 3 individual pots under the new small pots rule.


4. Trivial Pension

The limit for Trivial Pension has been increased from £18,000 to £30,000.

This means that if the total of ALL your pension funds, whether in payment or still invested are worth £30,000 or less then you can take the entire fund(s) as a lump sum (at least 75% eligible for tax).


Pension Drawdown from April 2015

Assuming that the Chancellors budget proposals become law, then the conditions 1 – 4 above will all be come redundant / obsolete as everybody who is in drawdown and aged 55 or over, will have no limits or restrictions on how much, or how often they take money from their fund.

It is proposed to be a simple as that but beware – careful consideration needs to be given to how you take money from your pension fund, if not only to ensure it meets with your needs but equally to make certain that you don’t give more of it back to the government in income tax.

If you would like further clarification on any aspect discussed on this web page please contact us on  020 33 55 4827.

 
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Please Note : The new Pension Freedoms place a great deal of responsibility on the customer to make the right long term decision about their pension fund and how it is used. While Government Ministers say they "trust" people to make the right decisions, they will not have to deal with the financial consequences of a customer making the wrong decision. Your pension fund was intended to provide you with a long term income in retirement, if you take it all as one lump sum you may find yourself with little or no income during the later years of your life. This website does not give personal financial advice, you should think very carefully before making an irreversible decision. If you are in any doubt please seek independent financial advice or speak to the Governments free Pension Wise guidance service.
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