PensionsAug 21 2014

HMRC: Three ways to access pensions

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The government has provided the first details of how individuals will be able to access their retirement savings from April 2015.

HMRC published draft guidance around the Taxation of Pensions Bill on 6 August giving further information on the new regime first outlined in this year’s Budget. As expected, savers will have the option of taking lump sums from their pensions pots at any point after the age of 55 without crystallising.

Annuities and drawdown will also become more adaptable and accessible. Those at retirement will be able to purchase an annuity using any proportion of their pension pot while a new ‘flexi-access’ drawdown fund will be introduced, with flexibility around how much individuals draw and how often.

The 25 per cent tax-free lump sum can also now be taken at any time after the age of 55. Anything above 25 per cent will be taxed as income.

HMRC estimates 130,000 retirees a year will take cash from their pension pot under the new rules. The new option is most attractive for wealthy clients with relatively small pension arrangements, who are basic-rate tax payers, and have substantial material wealth outside of pensions.

But there are concerns that the new arrangements will lead to savers sleepwalking into a tax liability, moving their earnings into higher or top rate by accessing their pension pot.

Simon Gould, chartered financial planner at Kilsby Williams & Gould, said, “The default position is that we will look to an annuity in the first instance, or better still, impaired life annuities as a first choice. Only where clients have more than sufficient wealth to provide for themselves in retirement, or where there are other compelling considerations, will we look for an alternative.

He added, “The facility to take personal responsibility and to draw down whatever and whenever is a wonderful move away from a nanny state.

“However, with freedom comes responsibility and the new facility must be used wisely. Most people do not save enough for their retirement and to blow it all in a few years is irresponsible.”

julia.faurschou@ft.com