I’ve worked in the pensions industry for more than 25 years now, and I don’t think I’ve ever been genuinely speechless. But that changed with this Budget. The Government’s proposed changes to pensions, giving people the ultimate flexibility in when and how they take these savings, is literally a game changer.
We have a range of interim measures coming into effect also immediately. These will allow more people to qualify for flexible drawdown, and higher income to be taken from capped drawdown.
This increased flexibility should also be extended to investment-linked annuities. At the same time, much needed increases have been announced to the triviality rules. In simple terms people can take pots up to £30,000 as a lump sum. The standalone rule – which allows pensions to be encashed without reference to other pension savings – has increased from £2,000 to £10,000 with people being able to cash in up to three pots.
But all of that is merely a prelude to the main event. From April 2015, people can take their pension benefits as and how they wish once they reach age 55. The quid pro quo is encashments above the 25 per cent tax-free cash level are subject to income tax, at the individual’s marginal tax rate.
This flexibility sounds fantastic, and will be hugely beneficial in the right circumstances. But there is a very clear need for advice. The worry is some people will operate on an emotional level and simply cash in all of their pension pot at once.
There will be a huge need for people to consider the tax impacts around when they take their benefits – why pay 40 per cent tax to simply put the money in a bank?
And crucially, while flexibility is great, many people will continue to need a secure certain income which will last for the remainder of their life. Or, in other words, an annuity.
Finally the Government banning transfers from public sector DB schemes is an interesting move. I doubt we’ve heard the end of this, as members and unions will be arguing they should get increased flexibility in line with DC members.
Andrew Tully is pensions technical director at MGM Advantage