Budget 2014: What do the changes to pensions mean to you?

Budget 2014- Pensions

The 2014 budget has given us some very useful surprises, but what do they mean for you? Read on if ‘retirement’ will be in the next 12 months for you, because this could make a big difference.

Pensions have seen very welcome changes for those who did not appreciate feeling compelled to swap their pension fund for an annuity.

So, what specifically has changed? The headline said you can take all the pension as cash…

If any of your pensions are worth less than £10,000 (and you are over 60 at the time), you can now draw up to three of them as a cash lump sum instead of having to buy annuities.

If all your pension provision is worth less than £30,000 put together (and you are over 60 at the time), you can draw it as a lump sum.

In both of those cases, part of the money is tax-free, just like the pension lump sum is usually tax-free. The rest is taxed as though it is your income.

At any age, if you can prove that you have at least £12,000 per year guaranteed income, then you can spend your whole pension fund at once. Guaranteed income includes your state pension and any other pensions that you’re already receiving.

Many people will need to be over state pension age to make good use of that, because the average pension pot is too small to provide £12,000. State pension is around £6,000 for most people so you’ll probably have to use some of your pension pot to top up to the magic £12,000 figure. I estimate it would take about £95,000 to secure the other £6,000 with an annuity if you’re 65 now.

If you have a large pension and you’re 55, you’re now allowed to secure your £12,000 annuity, then spend the rest of your pension all at once, if you don’t mind a hefty tax bill. I estimate it costs about £240,000 to secure £12,000 per year if you’re 55. I wonder whether people will start to draw their final salary pensions early, to be able to ‘get at’ their private pensions? That sort of decision needs independent advice. Of course, I would say that, but even the Chancellor knows it’s true.

If your pension value lies between £30,000 and £Enough-To-Secure-£12,000 per year, then you aren’t allowed to spend it all at once. You are allowed to draw your pension without buying an annuity, and you can spend it faster than before; you can withdraw one-and-a-half-times what you could get as an annuity. Let’s say your pension is big enough to secure £8,000 per year, then you can withdraw £12,000. That does sound appealing, but what happens when it runs out?

As your Chartered Financial Planner, I have to make a comment about this. I think it’s both brilliant and dangerous. Brilliant because it gives people choice and control. Dangerous for the same reasons, really. It’s easy to think that the annuity providers deserved a kicking, but it’s a fact that annuities are pretty good value if you do live a long life.

Get in touch by email on info@parsonagefinancial.co.uk or call on 0161 928 2706 for more help.

Flora Maudsley-Barton

Here's a little more information about our team:

Q: Qualifications Include

A: My degree in modern languages included a module on economics and personal finance, and that's how I got into financial planning.

Since then, I've become dual qualified as both a Certified Financial Planner and a Chartered Financial Planner, including the specialist qualifications in Tax & Trusts (G10) and Pensions (AF3/G60).

The full list is:

AF3 - Pensions (CII) (I did that to totally update my pension knowledge, as I had done G60 in 1994.)
K10 - Retirement Options (CII)
K20 - Pensions Investment Options (CII)
G20 - Personal Investment Planning (CII)
Chartered Financial Planner (CII)
ER1 - Equity Release (CII)
HR1 - Home Reversion Plans (CII)
G10 - Taxation and Trusts (CII)
CFP - Certified Financial Planner Licence (IFP)
H15 - Supervision and Sales (CII) 

In November 2016 I added the STEP (Society of Trust and Estate Practicioners) Certificate for Financial Services.

Q: Do your clients have anything in common with each other?

A: They are all lovely and there are a few similarities in their aims that I've noticed. 

Many of my clients want to do more than just meet their own needs. They also see themselves as custodians of their money for the next generation or for other beneficiaries. 

In other cases, their aim is to manage their wealth efficiently during their lifetime, with the aim of spending it all… but minimising tax on the way there.

Q: What type of work do you enjoy most?

A: I do get a real sense of satisfaction from the work with those clients who engage me to manage the needs of two generations of the same time. That can be 'just' a long-term and balanced investment strategy or it can be trust planning and estate planning to avoid paying too much Inheritance Tax.

Q: Where would you be right now if you weren't at work?

A: In the Lakes

Q: In the film of your life, who would play you?

A: In my head, it's Uma Thurman, but I expect they would approach 'Nursey' from Blackadder II.

Q: Curry or Hot Pot?

A: Agh, too difficult. Curry.

Q: Sherbert or Chocolate?

A: Chocolate

Q: Lawn or Flowers?

A: Lawn

Q: What are you most likely to do whilst being 'on hold'?

A: Infuriate my colleagues by opening conversations then cutting off their reply when my call is answered.