Posted by Flora Maudsley-Barton | March 28, 2014
Budget 2014: What do the changes to pensions mean to you?
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.
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