What might Pension Release look like in 2015?

In this year’s budget, The Chancellor announced some significant changes to pension rules, specifically with regard to accessing your money. Once these changes have been passed into legislation they will become law.

The plan is that from April 2015, everyone with a Defined Contribution pension, such as Personal Pension, Stakeholder Pension and Occupational Money Purchase Pension, will be allowed to release 100% of their pension fund as a cash lump sum, subject to tax and as long as they have reached age 55 or more.

This is a significant change because currently, most people can only release 25% as a cash sum; the balance would have to be used to provide income, usually in the form of buying an annuity*.

Obviously this greater flexibility it potentially very good news for those people with Defined Contribution schemes.

Unfortunately, anyone in a Public Sector Defined Benefit scheme, such as Local Government pensions, NHS, Teachers, Armed Forces, Fire Service, Police etc will not have this same option and will be banned from transferring into a Personal Pension. In most cases, people with these types of pension scheme will only have the option to take roughly 25% tax free cash and the balance must provide an income for the rest of their lives and would be subject to income tax.

The government are also consulting on whether to ban transfers out of Private Sector Defined Benefit schemes; we should have an answer about this sometime this autumn.

In the main, most people with Defined Benefit pension schemes are better off taking the direct option of a cash lump sum and an income for life. Given a normal life expectancy they will probably end up with more money in their pocket, over time, than if they took the whole lot as a cash sum. However, it’s a great shame they won’t have the choice of cashing the whole lot in if they wanted to and be banned from transferring to a pension that would allow them to.

If someone with one of these types of pension scheme transfers their money into a Personal Pension (which you are currently allowed to do) now, before April 2015, they will then be able to access their entire fund from their Personal Pension after April 2015.

If you think you might want to release 100% of your pension fund after April 2015, whether your pension plan allows you to do it or you need to transfer into one that does before then, there are some very important considerations you need to think about first, or, even better, get some professional advice.

  • Only 25% of the pension fund is tax free, the balance would be taxed at your marginal rate, which in some cases could be as high as 45%. It would depend on your individual circumstances and you would have to plan for any future changes to UK tax rules. Doing so could also result in the loss of all entitlement to means tested state benefits and the loss of all retirement income from this source.
  • The thing is, if you plan ahead you could possible mitigate some of the tax; you don’t have to take the whole lot in one lump. You could take a smaller amount and spread the payment out over a number of years. Think and plan what you’re doing; don’t just blindly release the whole lot without thinking about it first.

If you want to find out more information about Pension Release after 2015 please feel free to contact us at Grove Pension Solutions Ltd.

*An annuity is when you give the bulk of the money in your pension fund to an insurance company in exchange for them providing you with a guaranteed income for the rest of your life.