New flexibility for pensions
George Osborne today announced significant changes on how people will be able to access their defined contributions pension savings in the future.
Several minor changes, taking effect later this month, will be made to relax the rules regarding the amounts which individuals can withdraw from pension funds, either tax-free or at their marginal rates. These changes include increasing the number (from two to three) and size (from £2,000 to £10,000) of a single pension pot which can be taken as a lump sum and increasing the amount of pension savings that can be taken as a lump sum (from £18,000 to £30,000).
More fundamental changes are proposed over the longer term to allow withdrawals to be made without tax penalties. Currently, members of a pension scheme registered with HMRC are charged to tax at a rate of 55% if they withdraw their defined contribution pension savings at the point of retirement (in excess of their 25% tax free lump sum). As a result, the majority of people choose to purchase an annuity and receive taxable income over the course of their retirement.
Members will continue to be entitled to withdraw 25% of their savings as a tax-free lump sum and to use the remainder to purchase annuities. However, in the future, members will also be entitled to draw down their savings (in excess of the 25% tax-free lump sum amount) with the pension income taxed at their own marginal rate of tax. The changes are represented in the diagram below (from page 46 of the Budget paper).
Please contact our Head of Pensions Ron Burgess (Ron.Burgess@olswang.com) to discuss these changes.