Budget 2014: Your Pension - you can spend it all at once - David Gallagher - Partner Field Fisher Waterhouse LLP
The pensions changes in the Budget have been a major talking point. Here David Gallagher, our Head of Pensions, shares his thoughts.The Chancellor has announced radical changes to pensions. The most
The pensions changes in the Budget have been a major talking point. Here David Gallagher, our Head of Pensions, shares his thoughts.
The Chancellor has announced radical changes to pensions. The most radical one only applies to defined contribution schemes, which are often called "money purchase" schemes.
The main change is that from 2015 individuals will have the choice to take some or all of their pension fund as cash at any age from 55 onwards. They will pay tax on this but only at their marginal rate at the point of income. Carefully structured, drawing from one fund could be combined with deferring another pension and state pension to produce significant tax savings.
This removes one of the structural rules of UK pensions and over the next year the Government will examine all the knock-on effects and decide which ones it can tolerate. It has already flagged up that it will ban most public sector workers from transferring their final salary pensions to a DC scheme to take the pension as cash. They are not sure whether they will need to do this for private sector schemes.
It also reverses the position taken by public authorities that transferring members to schemes which allow them to cash out their benefits are abusing the current system - the new system is based on legitimising that practice, which up until now has been known as "trust-busting".
There are a lot of major questions to be answered over the next year. The most technical is how this interacts with the changing rules on what is a "money purchase" benefit and what is a "money purchase" scheme. The less technical issues include: Will a transfer ban produce a rush to beat it? Will final salary schemes let their members convert to money purchase without transferring out? Will all the complex rules on foreign transfers - which are focussed on maintaining the UK's ban on taking a pension fund as cash - be abolished?
The budget also introduced some immediate (from next Thursday) flexibility which mainly takes existing easements and increases their impact by changing monetary limits. So the current rules that anyone can take their pension pot as cash if it is worth less than £2000 and they have only 2 such funds becomes £10,000 and 3 such funds. The £18,000 lump sum threshold for lump sums in a scheme which is winding up becomes £30,000.
Another new rule will be a requirement on pension providers and money purchase schemes to give every member free face to face advice at retirement. For money purchase pension schemes this will be a major cost and, if there is no duty on an employer to contribute, it cannot be provided for free. For the government the point to note here is that the advice is likely to focus on the increased scope to reduce income tax in retirement which they have created.
The Chancellor has announced radical changes to pensions. The most radical one only applies to defined contribution schemes, which are often called "money purchase" schemes.
The main change is that from 2015 individuals will have the choice to take some or all of their pension fund as cash at any age from 55 onwards. They will pay tax on this but only at their marginal rate at the point of income. Carefully structured, drawing from one fund could be combined with deferring another pension and state pension to produce significant tax savings.
This removes one of the structural rules of UK pensions and over the next year the Government will examine all the knock-on effects and decide which ones it can tolerate. It has already flagged up that it will ban most public sector workers from transferring their final salary pensions to a DC scheme to take the pension as cash. They are not sure whether they will need to do this for private sector schemes.
It also reverses the position taken by public authorities that transferring members to schemes which allow them to cash out their benefits are abusing the current system - the new system is based on legitimising that practice, which up until now has been known as "trust-busting".
There are a lot of major questions to be answered over the next year. The most technical is how this interacts with the changing rules on what is a "money purchase" benefit and what is a "money purchase" scheme. The less technical issues include: Will a transfer ban produce a rush to beat it? Will final salary schemes let their members convert to money purchase without transferring out? Will all the complex rules on foreign transfers - which are focussed on maintaining the UK's ban on taking a pension fund as cash - be abolished?
The budget also introduced some immediate (from next Thursday) flexibility which mainly takes existing easements and increases their impact by changing monetary limits. So the current rules that anyone can take their pension pot as cash if it is worth less than £2000 and they have only 2 such funds becomes £10,000 and 3 such funds. The £18,000 lump sum threshold for lump sums in a scheme which is winding up becomes £30,000.
Another new rule will be a requirement on pension providers and money purchase schemes to give every member free face to face advice at retirement. For money purchase pension schemes this will be a major cost and, if there is no duty on an employer to contribute, it cannot be provided for free. For the government the point to note here is that the advice is likely to focus on the increased scope to reduce income tax in retirement which they have created.