Budget 2014: the pension changes that could affect you

The 2014 March Budget announced some radical changes to pensions.

Here we outline the changes and where they could affect you.

Immediate changes

From Thursday, March 27th 2014 the following changes will take effect:

Capped drawdown – the limits for capped drawdown are increasing from 120% to 150%of the equivalent annuity. If you are currently in capped drawdown, you will be able to increase the amount of income you take at the start of your next pension year after this date. If you commence capped drawdown for the first time after this date, you’ll be able to take income up to 150%.

Flexible drawdown – is available to individuals who have secured minimum pension income. Once you’re in flexible drawdown you can draw income, subject to income tax, at any time without restriction. This minimum income limit has been reduced from £20,000 to £12,000 from this date.

Smaller valued pension funds – if the total of all your pension savings is less than £30,000 you will be able to take this all as a lump sum if you have reached the age of 60. 25% of the lump sum will be tax free and the remaining amount will be taxed as income. This is an increase to the previous limit that was set at £18,000.

Multiple small pension pots – if you hold small private pensions worth under £2,000 you were, pre-Budget, able to take two of these as a lump sum. Again 25% would be paid tax free with the remaining amount subject to income tax. The Budget has increased the limits to allow savings of up to £10,000 to be treated as a small pension pot. It has also increased the number of small pots that can be taken to three.

Further changes that will take effect from April 2015:

Access to all of your pension fund – From retirement age, currently 55, the option to take your entire pension fund from a defined contribution scheme as a lump sum will be available to all. Currently this is only available to individuals who have smaller pension pots or enough secured pension income to opt for flexible drawdown. A tax free lump sum of 25% of the fund will still be available and the remaining funds will be taxed as income, allowing you to decide when and how much income you take at a time that’s right for you.

Guidance guarantee – with more flexibility around taking pension benefits the government wish to ensure that individuals have access to appropriate guidance at retirement. From April 2015, they plan to introduce a “guidance guarantee” to ensure that individuals are given full information about retirement options by way of free face to face guidance.

Public sector pensions – the option to transfer benefits from a public sector ‘defined benefits’ scheme to a “defined contribution” scheme will no longer be available, except in some very limited circumstances that are yet to be defined.

Private sector pensions – the option to continue to allow transfer benefits from private sector defined benefits schemes to a defined contribution scheme is under consultation. It is possible that this may be removed also or some restrictions placed on these types of transfer.

Additional proposals

There were further proposals in this year’s Budget that will be consulted on. At the moment they are only proposals. These are: 

Minimum pension age – proposals to increase the minimum pension age from 55 to 57 from 2028. The proposal is that future increases will apply at the same rate of increase as currently applies to the state pension age from 2028 when it reaches 67.

Tax on death benefit lumps sums – consideration is being given to whether the current 55% tax charge on death lump sums should be reduced.

Tax relief on contributions by the over 75s – consultation will also consider the potential for tax relief on contributions paid after reaching age 75.