The Treasury is set to give pensions savers even more freedom over how they take out lump sum amounts from their pension pots without having to enter into a drawdown policy.
The government has announced a change to the tax rules which allow individuals aged 55 and older to access their defined contribution (DC) pensions as they wish starting from April next year. Currently, people who want to take out their pensions as a lump sum can take one withdrawal of 25 per cent tax-free, while the remaining 75 per cent will be placed into a drawdown account. The new move means regular 25 per cent withdrawals can be made tax-free and then the 75 per cent left will be taxed at their existing rate, without having to enter into drawdown.
From April, an estimated 320,000 retirees with DC pensions will be able to access them as they wish, subject to some tax.
The changes have been broadly welcomed, but Morten Nilsson, chief executive of Now:Pensions said that the reforms are taking the industry into unchartered territory.
While many returns are welcomed and overdue, he said the government must remember the fundamental purpose of pension saving – to provide an income in retirement for however long you live. He added that a balance needs to be struck between flexibility and responsibility, and the government needs to be more “consistent and coherent” in its approach.
This move comes in addition to an announcement from the chancellor of the exchequer, George Osborne, that from April 2015 individuals will have the ability to pass on unused DC pensions to any nominated beneficiary when they die, rather than having to pay 55 per cent tax which currently applies – the so-called ‘death tax’.
Greg Kingston, head of marketing and proposition at Sipp provider Suffolk Life, said, “Investors will first need to understand the impact of the new rules and then, crucially, they and their advisers will need to have sufficient confident that those same rules are not going to change again and become more restrictive.”
