The chancellor has delivered the most liberating budget for pensioners in recent times. The greater freedom introduced will not only allow individuals to tailor their pension access but will also release the shackles of annuities and restrictive pension income levels, putting pensioners in control of their own hard-earned pension pots.
This is extremely good news for pensioners. At last tax restrictions on access to their pension pots will be removed, ending the requirement to buy an annuity.
The icing on the cake will be the option to take the whole pension pot in cash (with the usual 25% tax free) but with the balance being charged at an individual’s normal income tax rate, down from the current arbitrary 55% to 20% in many cases.
This new freedom is to be introduced from April 2015 and, as an interim measure, from 27 March 2014 a number of relaxations to pension access have been introduced:
- It will still be possible to take a quarter of your pension pot tax-free, as today
- People already in drawdown, where the income cap has been limited to 120% of value, will now be able to extract 150%
- Where flexible drawdown applies, the unlimited amount that can be taken each year remains but one of the required conditions for guaranteed pension or annuity income elsewhere is reduced from £20,000 to £12,000 per annum. This is called the “minimum threshold” and will enable easier access to many individuals during this 2014/15 interim year
- Where an individual aged 60 years or over has total pension savings of £30,000 or less, they will now been able to take all of those savings as cash lump sums – and this could include up to three separate pension pots of £10,000 each
The interim measures introduced will be a first step in liberating the pensions market and will also be a prelude to complete freedom to drawdown as much or as little of your pension from April 2015.
In one fell swoop Mr Osborne has revolutionised pensions with total cash freedom, which is really quite a neat stroke as this liberalisation will actually lead to an increase in tax receipts. This is, however, trusting pensioners with their pension pots and in this modern era of longevity the key to successful delivery of these plans will be an affordable advisory system.