Pension & ISA Changes

You are no doubt starting to see a lot of press regarding the proposed pension legislation and enhancements to ISA investments as we head up to the 6th April 2015. Naturally there are concerns and questions being asked, especially in the media and there are those that feel that the government are looking for short term tax revenues at the expense of a longer term drought of pension income.

Notwithstanding this, there is much flexibility being offered to people with all sizes of pension fund and it is our thought that for those that take care to manage and review their retirement arrangements and take appropriate advice, there are large benefits from this much enhanced flexibility, which not only includes how you draw your pension income in the future but how you pass down your pension funds to your nominated beneficiaries upon death in a very tax efficient manner.

These Pension Freedoms are largely being aimed at those with ‘Defined Contribution’ (Money Purchased) pots as opposed to those in Final Salary (Defined benefits) schemes.

Please see the main bullet points below detailing the main changes / enhancements. Some will and some will not relate to you.

Pensions Freedoms
Flexi-access Drawdown (FAD)

• All new Pension drawdown plans from 6 April 2015 will be flexi-access drawdown (FAD).
• 25% tax free cash can be taken from designated drawdown fund and then there are no limits on income levels.
• Balance can remain invested, or paid as a lump sum, or used to provide flexible income. A person’s marginal rate of income tax will apply on any of the above combinations. (Subject to available Lifetime Allowance)
• Once any income taken, £10,000 money purchase annual allowance applies i.e. the amount that you can save into pensions each years (pension input period).
• Pre April 2015 flexible drawdown arrangements will automatically become FAD.

Existing Capped Drawdown

• No new capped drawdown arrangements can be set up post April 2015.
• Existing plans can remain in place and continue with reviews and Government Actuarial Department (GAD) limits.
• Can convert to FAD on member’s request.
• Automatically convert to FAD if your income in future exceeds 150% GAD.
• You can retain the standard £40,000 annual allowance where income remains within GAD limits i.e. the amount that you can save into pensions each years (pension input period).

Uncrystallised Funds Pension Lump Sum (UFPLS)

• For those who want to draw everything out of their ‘pension pot’
• Lump sum drawn directly from uncrystallised money purchase pensions.
• 25% of the lump sum is paid tax-free.
• The balance of the lump sum is taxed at the member’s marginal rate of income tax.
• Once a UFPLS is taken, the £10,000 money purchase annual allowance applies.

Death Benefits

• The key to new rules is distinction between deaths pre and post age 75.
• No longer a distinction between crystallised / uncrystallised, or dependant / non-dependant benefits.
• Pre age 75 benefits to a nominated beneficiary are free of all tax – lump sum or income.
• Post age 75 drawdown income payments to a nominated beneficiary – subject to income tax at beneficiary’s marginal rate. There are no restrictions on the level of withdrawals.
• Post age 75 lump sum death benefits in 2015/2016 will be taxed at 45%.
• Post age 75 lump sums from 2016/2017 will be taxed at the beneficiary’s marginal rate.
• Similar treatment applies to annuities for pre and post age 75 situations.
• The nominated beneficiary can pass any unused drawdown funds onto a successor on their death. The same tax treatment will apply, also depending on the age at death of the beneficiary.

ISA

• ISAs will retain their tax-free status when passed on to a spouse or civil partner following death.
• It is the ISA allowance that is passed to the surviving spouse or civil partner when the ISA saver dies which will equate to the value of their ISA holdings at the date of death.
• The annual ISA subscription limit for 2015/2016 rises to £15,240 from £15,000, in line with movement in the Consumer Price Index (CPI).
• The limit can be invested wholly in cash, stocks and shares or any combination between the two.
• Savers aged 16-18 can subscribe up to £15,240 into a cash ISA in 2015/2016 but are not permitted to open a stocks and shares ISA.
• A saver may only open a maximum of one cash ISA and one stocks and shares ISA each tax year.

ISA versus Pensions

• Pensions will, like for like, outperform ISAs in the majority of scenarios.
• This is largely due to a combination of tax relief on contributions and the ability to take a quarter of the fund tax free.
• ISA’s will have the upper hand if access is needed prior to age 55 or if accessing pension in one go then marginal rate tax may be punitive.
• However, anyone with sufficient allowances and receiving tax relief at 40% on pension contributions will be in a better in position in a pension regardless of how much tax they pay on the way out.
• If you factor in the new pension death benefit rules and the case for pensions becomes even stronger.
• Consequently, pensions ought to be the default saving choice and moving existing savings into pensions in the run up to retirement should always be considered.

If you would like to know more about how we add value when advising you based on your own circumstances, please contact us on 01626 833225.

Please note that the above article does not constitute financial advice.