Tax benefits from new rules
Pension changes: risks as well as rewards
But experts believe there are hidden dangers and advise anyone eager to get their hands of their money to seek professional advice.
Some critics of the surprise upheaval announced in Chancellor George Osborne’s (pictured) March Budget are worried that far from increasing savers’ rights and liberating their cash, it is the next mis-selling scandal in the making.
This is because many individuals, lacking sufficient knowledge and unwilling to pay for advice, will make the wrong decision and risk leaving themselves penniless in their old age.
There has already been talk of people squandering their savings on big cars and holidays of a lifetime. Some advisers are concerned that the public remains largely ignorant of the changes or the implications of withdrawing their funds. Advisers fear that some of those who spend their pension pots will still expect a generous pension when they retire.
Osborne has been praised and criticised in equal measure for, on the one hand for liberating pension savings, and other for announcing the changes with no consultation with the industry, providing opponents with ammunition to accuse him of an election bribe.
Those with small pension pots and low incomes are particularly vulnerable as they are likely to be the ones who will be tempted to see their fund as nothing more than a savings account they can access at will. The rich, who may have enough in their pots not to need an annuity, will benefit most.
The changes taking place from April generally mean savers aged 55 and over will no longer be forced into buying an annuity once they take their maximum tax free lump sum. In other words, they will be able to spend the money as they please.
The saver is not the only beneficiary. There are political benefits, too. One reason the government is said to be doing this is because it currently gets next to nothing from millions of pounds tied up in pension funds that are used to pay annuities. From April, it expects thousands of people to turn these pots into cash – triggering a tax windfall for the Treasury.
Instead of having to take one lump sum (25% of the total) savers over the age of 55 will have the option of taking several smaller lump sums. In each case, 25% of the sum will be tax-free.
Pension advisers say this change is already available in the form of “phased retirement” or “vesting”. Nevertheless, the change will become more widely available.
The main beneficiaries will be those paying 40% tax. If you have a £200,000 pot, you take it all in cash, including £50,000 tax-free. The remaining £150,000 would be liable for tax and 40% tax would be more than £50,000 after personal allowances.
Taking £50,000 each year for four years would provide a £12,500 tax-free lump sum leaving you liable to tax on the remaining £37,500, perhaps as little as £5,500 a year, a total tax saving of more than half.
Individuals should consider using their £15,000 ISA allowance. For a married couple they can each park that sum with the ability to draw down the money tax-free.
If your total pensions are worth less than £30,000 and you’re aged over 60 you may be already able to take the total as a cash lump sum.
This is known as “pension triviality”.
The £30,000 limit applies to all your pensions, apart from the state pension.
The first 25% can be taken tax-free, and the remainder is taxed as income in the year in which it is paid.
Under the new rules you may be able to access small pension pots under £10,000 each as cash, providing you meet certain criteria, which includes being over 60 and being in a pension that permits you to do this.