Over the past six months I suspect you have received almost daily updates and opinion on the new ‘Pensions Choices and Freedom’ for those in defined contribution pension schemes.
The aim of this article is to cut through the jargon and attempt to provide you with a clear understanding of the facts supporting the new reforms and of the changing pensions landscape.
Pick and mix pension benefits
Those wishing to access their pension savings can do so in four different ways, or a combination of them:
• Take a lump sum, or a series of them
• Buy an annuity from their scheme provider
• Buy an annuity from an open market option
• Enter income drawdown
The first point to make is that different rules are in play. In true British style we have interim arrangements until 6 April 2015, when the new rules come into effect.
The Finance Bill 2014 brought the interim rules into law and paved the way for changes proposed for April 2015, although we will have to wait until the parliamentary autumn session to get confirmation of the changes to come next year.
Until 5 April 2015
The pension commencement lump sum (PCLS), also known as tax-free cash by the general public, remains at 25 per cent. However, it is now possible to take the lump sum from one provider and invest the remaining balance with another, whilst also retaining any protected pension age or lump sum entitlement.
This new freedom was a surprise to the providers, so it should be stressed that you should check that both providers have the capacity to facilitate the transfer before recommending it.
When the PCLS is taken individuals can defer making a decision on the remainder of the pension savings for up to six months. Be warned, after the six months the PCLS becomes taxable if no decision is made.
As a concession to those waiting until the new rules are in force, a waiver has been introduced that means the six-month period will not now start until 6 April 2015 for anyone taking the lump sum now, giving you until next October to make a decision.
Trivial commutation, which allows for an individual’s entire pension saving to be taken as cash, has been extended and is now available to those aged over 60 whose total pension savings amount to less than £30,000, up from £18,000.
For those with pension savings over £30,000, up to three pots worth less than £10,000 each can be taken, up from two pots worth up to £2,000.
