From 6 April 2015 individuals, on reaching age 55, will be able to access their “defined contribution” (DC) pension funds without restriction and without the need to buy an annuity.
The tax treatment of funds drawn will continue as before, with 25% of any lump sum taken from the fund tax free and the remainder taxed as income. Whilst this increases flexibility, it should be noted that taking a single income payment may push people into a higher income tax bracket for the year, with elements of the pension fund potentially taxed at 40%, 45% or even 60%.
Instead of taking a lump sum, individuals may want to consider other options, including taking the 25% tax free element up front and drawing regular income from the remainder; or drawing a series of smaller lump sums each split 25% tax free and 75% taxed.
In most circumstances, individuals flexibly accessing a DC fund will see their annual allowance for future DC contributions capped at £10,000 (with no carry forward of unclaimed allowance). The normal annual allowance of £40,000 remains for any defined benefit (final salary) scheme membership.
Under the new rules, individuals are obliged to contact all pension providers who they are contributing to within 91 days of flexibly accessing a DC fund or face a £300 fine, increasing by £60 per day.
6 April 2015 also sees the abolition of death tax on DC pension funds and/or dependant’s income if death occurs before age 75.
Individuals with pension arrangements worth more than £1.25m at 5 April 2014 should consider registering with HMRC for Individual Protection 2014. In doing so, the 5 April 2014 value becomes a personal lifetime allowance (up to £1.5m) rather than the statutory allowance of £1.25m. This potentially saves 55% tax on up to £250,000 of pension benefit, i.e. £137,500. Registration must be submitted to HMRC by 5 April 2017.