Government Pension Reforms and drawdown

For my second post I wanted to cover the government's proposed pension reforms announced in the 2014 budget.

These proposals will give people more freedom to access their defined contribution pension pot when they come to retirement.  The changes come in two stages; stage 1 applies to the financial year commencing 6th April 2014 (i.e. the current financial year) and the more radical stage 2 is scheduled to be implemented for the financial year commencing 6th April 2015.

Under the current system I have the following options.

1.  If I'm over 60 and I have a small amount of pension savings then I can draw down all of my pension with 25% being tax free and the remainder taxable at marginal rates.

2.  Or at any stage from 55 onwards I could buy an annuity, at the point of taking an annuity I have an option to also take a, tax free, lump sum of up to 25% of the value of the pension pot.

3.  Or at any stage from 55 I can can choose to draw down an income from my pension pot.  There is a limit to how much I can draw down each year, and, as with the annuity option, at the point of draw down I can take 25% of the value of the pension pot as a tax free lump sum.

4.  There is a fourth option that applies only if I have a guaranteed pension income of above a certain amount and additional amounts in a defined contribution pot.  In these circumstances I can draw down all of the additional pension pot with 25% being tax free and the remainder taxed at the marginal rate.

This framework will persist for the financial year 2014  - 2015 but all of the limits will become more permissive. I have set this out in a table at the foot of the post.  HMRC have recently issued guidance for people who took out pensions at the end of 2013 - 2014 and who would like to unravel the arrangements to benefit from the reforms.

For 2015  - 2016 and subsequent years these old "access" rules will be replaced by a new,more permissive system.  At any age from 55 onwards I will be able to drawn down as much of my pension pot as I like regardless of the size of the pot or the amount of my other guaranteed income.  I will be able to take 25% of the pot as a tax free sum at any age from 55 on, all other draw downs will be taxed at the marginal rate. I've already established that I need to watch out for tax in planning my retirement

One other point of interest in the consultation document is that it makes a commitment to reviewing inheritance tax rates on defined contribution pots.  These are currently at 55%. 

I'd like to make a couple of "editorial" points.  

• Firstly this is not the end of compulsory annuities. No matter what lazy journalists might say compulsory annuities ended years ago.  What it does do, is make what used to be known as capped draw down much more straightforward, I don't need to worry about not taking an income above a certain limit dictated by the government actuaries department and there used to be some weird rules about draw down reviews that I never understood and now will never have to.  But the heart of the defined contribution system remains pretty much untouched, in terms of the contribution limits for pensions, the way that pensions are taxed and the restriction on drawing down pension pots before the age of 55.

• Secondly all of the detail on the proposed reforms remains outstanding.  Normally if the government was planning to reform the taxation of pensions in a year's time it would already have been through a long consultation process involving government agencies and other "stakeholders."  But this has not happened for these proposals.  Actually I think this is fair enough, consultation has a place but works best when government has set out the policy basics, consultation at too early a stage can be used to prevent change.  However, these proposals are supposed to be brought into legislation in Finance Act 2015.  Normally I'd say this is just not going to happen, but given 2015 is an election year I don't think deferral will be an option.  So there's going to be a lot of detail coming up in the months ahead, that I'll try and stay on top of and include in the blog. 

In the mean time I'm planning that next weeks post will take the chance to pull back from some of the detail and try and think about my financial aims for retirement.

		2013 - 2014		2014 - 2015
Small value pot		18,000		30,000
Maximum % that can be drawn down		120%		150%
Guaranteed income level for full drawn of additional pot		20,000		12,000