Osborne increases pensions flexibility
Pensions were one of the winners of yesterday’s Budget, as the Chancellor announced a raft of measures to increase the flexibility of defined contribution benefit schemes.
George Osborne had put an emphasis in his speech on this being a Budget for savers: “The message from this Budget is: you have earned it, you have saved it and this government is on your side.”
The government announced changes to the tax rules and other restrictions currently surrounding pensions - which the Chancellor added would require a separate Act of Parliament that will be in place by April 2015.
- Tax restrictions on pensioners' pension pots (those not in a defined benefit scheme) will be removed, ending the need to buy annuities
- The amount of pension savings allowed to be taken as a lump sum (called a 'trivial commutation') has been raised to £30,000, up from £18,000
- When pensioners reach 55, they can draw out as much as they like per year
- Small pension scheme savings may be taken as a lump sum increased from £2,000 to £10,000 as of 27 March 2014. The number of schemes that can be taken like this will be increased from two to three
- 25% of pensioners' pension pots can be taken out tax-free, the rest will be taxed at the normal income tax rate
- £20m being put aside over two years to offer pensioners free face-to-face advice about what their options are
- New Pensioner Bond issued by the National Savings Institute open to everyone over 65 from January 2015. A maximum of £10,000 can be saved in each bond, and up to £10bn of bonds will be issued. Rates will be set in the autumn and are expected to be 2.8% for a one-year bond and 4% for a three-year bond
- Caps on pensions lifted from £30,000 to £40,000 this June and £50,000 in 2015
- Income requirement for flexible draw-down from £20,000 to £12,000
The Chartered Institute of Taxation (CIOT) welcomed the increased flexibility introduced by these "huge" changes, but warned that it will have its drawbacks for some.
Commenting on the changes, CIOT tax policy director Patrick Stevens said that the complete flexibility over drawing money out, with no need for annuities, will make saving this way "irresistable".
"More money is likely to pour into pension schemes, especially in years coming up to retirement. This flexibility will have its drawbacks for some people. The current rules ensure that, generally, people leave sufficient in their pension pots to pay for their later years of retirement.
"There will surely be more cases in the future where people have used up their savings and rely on the state to look after them. Good quality advice will be crucial in helping people make the right decisions for their retirement," he said.
Osborne added that the changes do not apply to defined benefit pensions. But, there will be implications for these, which the governement is set to consult on.
For further information, see the official government documentation: