We’ve had a few days now to ruminate over Chancellor George Osborne’s fifth Budget statement. The headline news was a boost for “the makers, the doers and the savers”. A proper overhaul – very promising indeed.
However, like an over-protective yet well-meaning parent, we wanted to add our own word of caution. Pensioners, we don’t mean to rain on your parade, but before you start making plans to grab your entire pension fund and blow the lot on a trip around the world, there are a couple of things you need to think about.
What are the changes to pensions?
Pensions are being made more flexible which, on the face of it, seems like good news.
- From 6th April 2015 all restrictions on access to pension pots will be removed so pensioners won’t have to buy an annuity and you can access your entire pension fund as a lump sum
- If the value of your all your pension pots is £30,000 or under and you’re over 60, the balance of the funds can now be withdrawn in one lump sum – the previous threshold was £18,000
- The maximum sum that can be withdrawn under a capped drawdown arrangement will increase from 120% of an equivalent annuity to 150%
- The amount of guaranteed income needed in retirement to access flexible drawdown will reduce from £20,000 per annum to £12,000 per annum
- Any small pension pot of less than £10,000 may be taken as a lump sum – the current limit is £2,000 – and you’ll be able to access three small pots rather than the current limit of two.
So next year, I can take the whole lot?
Well yes, if you’re eligible to start drawing your pension, you could. But that doesn’t mean that you should. Firstly, you need to be aware of taxation consequences. The lump sum over and above your 25% tax free cash is added to your income for that year and taxed accordingly.
Here’s a little example. If you have a pension fund of £100,000 and you earn £20,000 p.a. then £25,000 will be received tax free. The other £75,000 will be added to your income giving you earned income of £95,000 for the year. So, this will push you into the 40% income tax bracket and suddenly you’re facing a tax bill of over £27,000. Scary. But there are ways to minimise this liability and keep the tax bill to a minimum whilst benefiting from sizeable lumps sums.
Secondly, you need to consider other factors such as your income requirements and your health. You never know what’s round the corner, you could have a lot more years ahead of you yet. Sustainable income will probably be the key for most people. The new rates for drawdown are attractive, but often it’s wise to focus on sustainable, not maximum, income.
Take a little time to consider your options. Pop by and see us for some unbiased financial advice to help you find the best way of making your pension go further. Please don’t let a lifetime of savings disappear in a puff of Ferrari exhaust fumes.
The Budget: The best of the rest
- Cash and shares ISAs will be combined into a single new ISA with the annual taxfree savings limit shooting up to £15,000 from 1 July. This will be called the New ISA, or NISA. Catchy
- Tax on a pint of beer has been reduced by one pence per pint. Just 100 pints and that’s a whole pound saved!
- Air passenger duty for long haul flights is being reduced
- Premium bonds prizes will be increased from one to two monthly £1million prizes from August 2014
- Bingo duty is being reduced from 20% to 10%
- Fuel duty rise planned for September 2014 won’t be taking place.
And to reward you for getting this far, here’s an excellent piece of pub quiz trivia you can share with your friends whilst saving a penny on your beer. The Budget is the only time anyone is allowed to drink alcohol in the chamber. Gladstone drank sherry, Churchill stuck to brandy (most of the time, in and out of the chamber actually), and Ken Clarke favoured a glass of whisky. This tradition has not been taken up by recent administrations. Maybe next year will be the year it returns…
Written by the advisers on the If you have any questions regarding the article, please contact the advisers, at GreenSky Wealth Ltd on 01603 340800.