Clive Barwell TEP CFP Chartered FCSI

What does the plethora of rules mean for your pension?

The Government is constantly tinkering with the way in which people can build-up and access their pension savings, but what does that mean for you?

The most fundamental changes to accessing pension savings were introduced in 2014 and 2015.

What didn’t change?

The minimum age at which you can draw a pension remains the same for the time being at 55, although it will increase to 57 in 2028 and, presumably, to 58 later.  In other words aligning it to the increasing State Retirement Age, albeit 10-years earlier.

Also, the first 25% of any accumulated savings can be taken as tax-free cash (correctly Pension Commencement Lump Sum – PCLS).

That a pension is still intended to provide people with life-long retirement benefits, not a car, boat or holiday!

What were the previous rules?

Before I go on to review the changes, let’s consider what the position was prior to 27 March 2014.

The balance of the fund, after the PCLS, had to be used to provide an income for life. There were a number of options for generating that income, the main ones being:

What did the new rules mean?

Flexible Drawdown for all.  From April 2015, Flexi-access Drawdown was introduced and capped drawdown abolished, although some retirees remain in such a scheme. Consequently, there are no minimum guaranteed pension income limits to qualify for what was flexible drawdown.

In essence, since April 2015, a pension comprises two elements:

So, theoretically, anyone retiring after April 2015 can withdraw all of their pension savings immediately, with the first 25% tax-free and the balance subject to Income Tax.

The Income Tax Rates for the 2023/24 Tax Year are as follows

First £12,570 0%
Next £37,700 20%
Next £87,440 40%
Balance over £125,140 45%

In addition, there is another sneaky band between £100,000 and £125,1400 in 2023/24, where the effective rate of tax is 60%, because of the gradual withdrawal of the Personal Allowance between those two figures!

Of course, other taxable income in the Tax Year of retirement also has to be taken into account, so, if someone earning £50,000 gross per annum retires on 05 October 2023, exactly halfway through the Tax Year, they will have already received £25,000 in salary.

Consequently, a one-off withdrawal might be inappropriate from a taxation point of view.  Spreading the withdrawals over several Tax Years Could make much more sense.

What are the issues?

Professional advice at the time of retirement is even more important now than it ever has been, because of the far-reaching implications of all the rules.

The issues to consider include:

Building-up pension savings

Lifetime Allowance

Introduced first in 2006, the Lifetime Allowance (LTA) was the limit on total pension savings permitted before the application of a penalty when accessing those benefits.  The headline rate of the penalty was 55% but, in reality, it was 25%, assuming only an income was drawn.  The LTA is due to be withdrawn but, with effect from 06 April 2023, the penalty rate was reduced from 55%/25% to zero.

In a way, the LTA does still apply, because the amount of PCLS available is limited to 25% of the last LTA, which was £1,073,100.  Consequently, anyone with more than the old threshold in all their pensions combined is limited to a PCLS of £268,275.

Contributions

Contributions to a pension can be made by anyone from birth to age 75.  Those contributions are limited to 100% of your “net relevant earnings” (P60 gross if you are employed, or taxable profits if you are self-employed or a partner), capped at £60,000 (increased from £40,000 with effect from 06 April 2023).  There is, however, a de minimis figure of £3,600 for people with no net relevant earnings, or earnings below that figure.

For those with net relevant earnings in excess of the Annual Allowance of £60,000, there is a carry-forward arrangement, whereby unused Annual Allowances from the previous three Tax Years can be brought forward.

The de minimis figure is a useful financial planning tool for both children and those post-retirement who still want to build savings, particularly if they also have a potential Inheritance Tax issue.  Personal pension contributions are made net, so a payment of £2,880 is grossed up by the pension provider by way of a tax reclaim of £720, to make the £3,600, irrespective of whether you are a Taxpayer.  This is a 25% uplift, so a great boost to investment returns.

For a child, if you are wanting to save towards their education costs – see my blog – or to help them get on the housing ladder, then pension is inappropriate because of it’s inaccessibility.  However, as a long-term savings scheme it is potentially unrivaled.  In December 2022 Unbiased, the Find-an-Adviser website, wrote:

“Assuming that you pay in the maximum amount for 18 years, and that average growth stays at 4 per cent, then by the child’s 18th birthday the pension pot will be worth around £95,000. Now, even if no further payments are ever made into this pension pot, steady growth at 4 per cent would take the pot to over £620,000 by the time the ‘child’ reaches the age of 65″.

This, of course, doesn’t take into account inflation, but it is a great start towards a more prosperous retirement.

More Information

If you want more information on the plethora of changes in legislation, Wikipedia has a useful index.

What next?

If you are anywhere on the journey to retirement, from beginning to end, talk to me about how we can exploit all the current rules to your advantage.




    - Retirement


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