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Budget 2014: George Osborne drops bombshell on pensions flexibility

The Government has announced a radical overhaul of pension rules which will mean that from April 2015 anyone over the age of 55 will be able to take their entire pension pot as cash.

Under reforms announced by Chancellor George Osborne today, the overall trivial commutation limit will be increased from £18,000 to £30,000 later this month.

The triviality limit on personal pension pots worth £2,000 will also rise to £10,000, with individuals allowed to take up to three separate pots as cash.

In addition, the flexible drawdown minimum income requirement will also reduce from £20,000 to £12,000, while the maximum income a person in income drawdown can take will rise from 120 per cent of GAD to 150 per cent.

However, these are only interim measures. In a potentially monumental blow to annuity providers, the Chancellor announced that from April next year anyone who is aged 55 or over will be able to take their entire pension fund as cash – although only the first 25 per cent will be tax-free. The remaining 75 per cent of the fund would be taxed at the saver’s marginal rate.

The minimum age people can access their entire fund will rise to 57 from 2028, when the Government plans to link the minimum age to rises in the state pension age.

The Government is also seeking views on whether the minimum pension age should increase further to allow people to accumulate more pension wealth before they reach retirement.

Osborne said: “I am announcing today that we will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots.

“Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want.

“No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity.”

MGM Advantage technical director Andrew Tully says: “This is an unprecedented change giving huge flexibility to how pensions are taken. We need to make sure people get help in working out the best way to take a tax efficient and sustainable income.”

Syndaxi Chartered Financial Planners managing director Robert Reid: “This makes A-Day look like tinkering. At long last people are being treated as adults – we just have to hope they behave as adults.”

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There are 30 comments at the moment, we would love to hear your opinion too.

  1. Interesting. Not really an incentive for young people to start saving though.

  2. And who will pick up the bill when people have p****d their pension pots up against the wall?

    A good way to boost tax revenues though.

    Some contradictions here though – one the one hand they say the MIG is falling to £12,000 for flexible drawdown then state that anyone can take out all of their pension fund as cash?

  3. This is purely about votes at the next election not about encouraging people to save for retirement.

    As usual sending out mixed messages which will mean people wont save for retirement.

  4. It seems quite clear to me. If you have £12K income under the flexible drawdown rules, you can take the rest out as a lump sum and it is taxed at your marginal rate. Will mean more people can take flex drawdown and no problem for the government if the money is then wasted as the £12K will keep people above benefits limits (I think). Could also raise a few quid for the government in the short term as lots of tax will be being paid that they would only get on the drip if people have annuities.
    150% of GAD is quite scary, especially if unadvised. Lots of potential for people wanting as much as possible and then having one hell of a shock at the next review date…
    3 x £10K pension out as cash regardless of the rest of your pension wealth could be an interesting area of planning once the numbers have been calculated.
    £30K triviality limit again really not a bad idea when the average pension is below this. The pension income wouldn’t make a lot of difference anyway, loads of tax to the government and people having a decent chunk to spend at the start of retirement.
    Free face to face advice for everyone at retirement…..good luck with that

  5. goodness gracious 19th March 2014 at 2:16 pm

    Is the 18k current triviality limit only allowed from age 60? So how can you empty a 30K pot at 55? Unless the age rule has changed as well.

    What these changes mean is your DC pension is much more like savings, or an ISA but with tax relief upfront. Bully for George!

  6. This proves that the introduction of NEST is a costly farce.

    A large majority of those in it will be able take the funds out at retirement meaning that they will still be a burden on the state.

  7. Generally positive and appear to include some things I for one was arguing for. BUT some of the quotes from George Osborne appear contradictory such as “No caps. No drawdown limits” and then capped and flexible dd still exist he says with capped drawdown capped at 150%????? Confused or what…..

  8. Can someone please explain the options of someone aged 60 (for the sake of the confusion with the minimum age rules around trivial commutation, in light of today’s budget allowing people to take their entire DC pension pots at age 55?!).

    Example aged 60 (no previous pension benefits taken) My pot is £100,000 – can take £25,000 tax free and the remaining £75,000 as a lump sum (subject to marginal tax) instead of purchasing an annuity.

    Trivial commutation increases from £18,000 to £30,000 but you can take you entire pension pot as cash… i’m a little bit confused – whats the point in having this £30,000 trivial commutation limit?

    Apologies if i’m completely miss understanding this. (clearly not an expert).

  9. Gareth Reynolds 19th March 2014 at 3:10 pm

    The 150% of GAD and trivial commutation increases are just interim measures from the 27th march until next tax year to give time for legislation changes to take place.

    From April 2015 the new measure to take as much of the pot as you want with tax at marginal rate after 25% tax free cash, will take place for anyone over 55.

  10. thanks gareth reynolds.

  11. Gareth Reynolds 19th March 2014 at 3:19 pm

    This is a good document from the HM Treasury site

  12. headbelowthe parapet 19th March 2014 at 3:39 pm

    Nice big windfall for HMRC next year – all that lovely tax paid as a balloon payment rather than a little trickle. Seemingly great for the client who can have a big injection of cash rather than a little trickle of income. Not so good for the pension providers who’ll see the back of a tsunami of cash leaving their coffers, although it may be offset somewhat by the influx if investment business – although this is not very likely. Pretty good for the high street, or rather the shops on the internet, who’ll notice an increase in cashflow.

    Probably pretty bad over the long term as the tax revenue dries up and pensioner poverty increases.

    Still it makes the baby boomers more likely to vote for the Tory party – which, let’s face it must be the goal.

  13. goodness gracious 19th March 2014 at 4:03 pm

    Remember the basic state pension increases to a flat rate in 2015, thus taking loads out of pensioner type benefits anyway. Would pensioner poverty increase? Probably not for those who are under 62. Thinking about it further, if all caps on drawdown are scrapped as the consultation paper proposes, then is passed, once crystalised your pension pot is somewhat like an investment bond, although no CGT charged. Income and growth are brought together as one but income taken has tax deducted at source (like an income bond) and higher rate tax can be charged as well (like an income bond) but you cannot defer a tax charge (which you can with an income bond). It is only when there is some money left over at death where there is a difference. With a bond the gain often increases income tax as it is a chargeable event, 40% being common, and then assessed for IHT. With a flexible drawdown pot left on death over 75, 55% tax is payable but no IHT. So it is beginning to look similar, what do you think or an I barking up the wrong tree. Woof Woof

  14. Thanks Gareth, the link was VERY useful and clarifies quite well. Very good news for flexibility I think. Effectively from April 2015 there will be NO trivial limit, take the lot, so long as you are willing to pay income tax at your marginal rate on it. If you become a non taxpayer, then NO tax…….. can’t complain at that.

  15. forgot to say age limit down to 55 from 60 effectively too for smaller pots.

  16. So from 2015 will the tax liability on crystallised pension pots remain at 55%?

  17. Do people really feel this is a good idea encouraging people to crystalise their pension benefits immediately?

    It appears good on the face of it with flexibility but if you look into it are people aware that the fund will have to perform well for the fund not to errode when we are 7 years into a 27 year recession!!

    Are normal people with fund sizes between 30 -100k aware of the high management charges that will be imposed by DD companies? Isn’t DD only really suitable for those with a min 100k pot due to these factors? Where’s the flexibility in locking into GAD rates for 3-5 years anyway?

    it seems good for flex dd but does the average person in the UK have enough pension provision to secure 12k per Annum? Especially when it has been identified there is a retirement crisis?

    It looks like a good idea for the rich but looks to encourage the average man on the street to take their pension pot as soon as possible & then become a bigger burden to the state in the future when the government won’t be here but we will still have to pay Tax & NI to cover it.

    I thought the government & FCA brought in RDR to encourage advice it seems to me that RDR & Pension Simplification were a complete waste of time. Aren’t advisers supposed to advise for the future not the here & now which is what taking your entire pension pot as cash will do despite the arguments with it being invested er elsewhere!! As good as tge DD death benefits sound will the average person have enough left to give a lump sum?

    It’s encouraging the money grabbing advisers to pick up more trail commission, providers to earn more out of management charges & leading the public down another blind alley for the future.

    For those good advisers who do give good quality advice & encourage good future planning by using all products available in Retirement it looks like they have been put in a difficult position with explaining charging as the government is insinuating it will be free!! I feel sorry for those who have just had difficulty overcoming that issue since RDR.

    It really seems like a policy for votes which will undoubtedly change when they are in power.

    Im not a DD expert but these new changes feel like the government wants to help the Daily Mail with headlines whilst getting a quick buck!!

    When will something sensible be put in place for Retirement & LTC in this country?

  18. I’ve been reading a book called “Blunders of Government”. I wonder if in 20 years time we will look back at today and view it as one of the worst decisions ever made? Fine to treat people as adults but when they’ve spent all their pension fund by the time they are 70 who’s going to pick up the pieces?

  19. And here’s another thought. I think that with these new rules 95% of people will only need two investment products! a Nisa and a SiPP. Discuss

  20. Generally good news

    Yes HMRC will benefit by getting the tax back in a lump rather than drip fed, and good for the clients should they wish to go this way and it gives them more flexibility; which is a good thing.

    Good call George (for once) !!

  21. It could see a rise in the use of purchased life annuities with peple taking max PCLS, drawing large chunks of their remaining fund (not drawdown) with basic rate tax deducted, working out how much they want to secure and purchasing a PLA and the balance supports early retirement lifestyle.
    Yes it will mean more thought is needed due to the extra flexibility, but I think this is a good proposal (having read the HMRC docs, it is not definite yet this will happen exactly as stated in April 2015 and their could be a few changes yet)

  22. This is a brilliant concept that will release illiquid pension pots onto the high street, car showrooms, internet retailers, and holiday shops (do they call these travel agents, still?), giving that essential boost to consumer spending that the UK needs. We have run out of equity in our houses, we have spent all our payment protection insurance compensation and now those who have no self control will beat liberty to boost the UK economy in a short term pension pot spending frenzy. Magical concept, and it is much better than the government nationalising my pension pot for the good of the nation. Let the little man, with the little spend his way out of our problems. Noble effort, Herr Chancellor.

  23. goodness gracious 20th March 2014 at 10:51 am

    @ David S
    Reading and hearing comments today from ordinary people, rather than the somewhat anal advisory industry, these reforms are hugely popular and can be a game changer for an undecided electorate.
    The biggest issue in pensions over the last 20 years and getting worse is:
    I paid into the pension for ages and I can’t get to my money and the promised income is well below what was promised. I never saw the tax relief as the payments either were adjusted in my pay or at source. so why bother, they are a rip off!
    reaction overnight is : at last, I can get to my money and spend it how I like, not how some faceless plonker tells me. Its my money! So pensions now are looking attractive, especially those who have been forced into AE schemes, which look great! I pay 4%, employer pays 3% and I get less tax taken from my pay. Then at 55 I get to spend the money on myself, sounds like a good deal to me!
    So many more pensions to be sold, including the self employed.
    Look at the bigger picture, loads more work, face to face advice to loads more people (looks like a voucher system) and a load of people who need advice on the appropriate investment balance for their pensions.

  24. How many people will miss the age it’s not 55 it’s 57 issue and just read that they can access monies at age 55?
    I am 49 and according to what I’ve read in HM Treasury proposals for consultation I will be caught by the minimum age people can access their entire fund rising to 57 from 2018 as will anyone born after 1963.

  25. I go away on holiday for a few days and the world goes mad.

    On a more serious note, the pensions market has needed a shake up for a while and this budget is at least heading in the right direction if not solving the problem.

    Being within financial services we all know that taking your entire pension pot as a lump sum and blowing it within a few years is a bad idea but it sits well with the public that it is an option. Hopefully throwing more options into the mix is going to make advice a more attractive option for your average guy in the street.

    As has been mentioned above the main changes are “subject to consultation” so i shall wait in anticipation of the final rules as they could be very different.

  26. Current scenario (mine): annuity (flexible income) taken out 2 years ago with £170K. Taxed income for life. Nothing for wife after 10 year guarantee expires if I die first. Nothing to leave kids.

    New scenario: £170K pot, tax to pay on £127.5K (drawn down over period to keep to basic rate). Purchase buy to let – receive taxed rental income. Wife receives rental income for life if I die first. Nice house to leave the kids.

    Which would I choose? I didn’t have the choice 2 years ago. Everyone in future will have the choice. I won’t have the choice, damnit. Is that age discrimination, or what?

  27. goodness gracious 21st March 2014 at 3:07 pm

    Richard L
    Pity you didn’t take advice 2 years ago then. Mind you you could have had wife at 100% or taken drawdown if you were worried about wife and kids. GAD rates would applied.
    I don’t know how much buy to let you could get without a mortgage on 127K. If you needed a loan then your taxable income would have been reduced hugely and it may not have been a runner anyway.

  28. I did take advice GG & went into it all very thoroughly. Don’t get me wrong, I was happy that I had a fair deal, given the conditions & limitations. (With the wonderful benefit of hindsight I would never have taken this route all those years ago.) But the point is that there is now going to be a vast discrepancy between what everyone like me is stuck with & what future pensioners can do. The numbers are academic. I wouldn’t have only had the pension pot to buy a rental & the return plus long term capital growth would have been very acceptable. But it would have given me that flexibility. And more’s the point I would have had my capital. Where has my capital gone? There’s a big inherited estate out there, somewhere, oiling the wheels.

  29. I am considering t/v my Co-op pension scheme [some F/S and some D/C] into my Stakeholder and next year taking the TFC and then withdrawing “x amount” year on year……seems like a plan!, keeps my money in my name instead of the the insurers’s and ex- employer!!

  30. Could this move also have something to do with interest only mortgages and the number of households that find themselves in a shortfall situation on capital repayments? If these people can use their pension pots to pay off or reduce the capital it will reduce the instances of complaints to the FOS and subsequent successful complaints being referred to the FSCS.

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