o Recently working on Pilot – looked into different pension options
Annuity + Cash lump sum + Flexi-draw
The new proposed rules will come in from April 2015
The changes affect those over 55 who have savings in a DC scheme
pension depends on the amount of money you (+ perhaps your
employer) have saved in scheme
Ran from 27 March 2014 to 6 April 2015
o Over 60 + haven’t touched pension pot + total pension savings =
no more than £30,000 can withdraw all of the saving
o First 25% of the money you take out = tax-free
o Rest is taxed as the top slice of your income in the tax year of
Pension schemes explained
Final-salary scheme Guaranteed pension based on earnings at end of
career + length of service i.e. DB schemes
Career average scheme Guaranteed pension based on average pay
DC scheme Determined by contributions + investment returns
o Usually worth less than DB
o Savings used to buy an annuity or retirement income - until now
Clara is 62 and has no other income, but does have a £20,000 DC pension
pot. She withdraws all £20,000 in one year. She receives £5,000 (25%)
tax-free and pays no tax up to her personal allowance of £10,000. She
pays 20% tax on the remaining £5,000.
Denise's pension pot is also £20,000. She is still working, and earns
£65,000 a year. She decides to empty her pension pot. Like Clara, the first
£5,000 would be tax-free, but the balance of £15,000 is taxed at 40%,
because she has already used all her basic rate tax band.
What is an annuity?
"Capped drawdown" take some money out each year
o Amount you can withdraw from drawdown fund will increase from
120% to 150%.
If capped drawdown + at least £12,000 a year of "secure pension income"
(including state pension & annuities in payment)
o Can move to "flexible drawdown" = gives complete freedom over
how much you take out of the pension pot
Before 27 March you could only move to flexible drawdown if
you had secure pension income of at least £20,000 a year
Remember that any money you take out of drawdown fund
will be taxed at your marginal rate, so you may want to take
the money out in stages so as to minimise the tax cost.
The planned new rules
From 6 April, 2015 – you will be able to take your entire DC pension
savings as a lump sum + spend/invest it as you like, as long as you are
Up to 25% of the money will be tax free, as now, but the balance will be
subject to tax at your marginal rate.
E.g. Emily is 60 and has taxable income of £50,000. She has £250,000 in
her pension pot, and takes all this money out on 7 April, 2015. She will
receive £62,500 without tax (25%) and the balance will be taxed at a
mixture of 40% and 45%. She also loses her personal allowance because
her total taxable income is over £100,000.
She would have paid less tax if she had spread the withdrawals over
Who is affected by the changes?
DC scheme members
o With this type of scheme your monthly pension savings go into a big
pot, which will eventually be used to buy an income for your
o Can now access that pot freely from the age of 55 taking out as
much as you like subject to tax.
Some with DB pensions will be able to swap them for DC scheme
How much tax will I have to pay?
You can take 25% of your pension pot as a tax-free lump sum
o Or you can take out smaller amounts, of which the first 25% will be
tax free on each occasion
o But you will have to pay income tax on the amount you withdraw
over and above the 25% tax-free allowance
If that amount, added to the rest of your income, exceeds
£42,386 (2015-16), for example, you will pay tax at 40% or
If the amount exceeds £100,000, you will begin to lose your
personal allowance, resulting in an even higher tax charge.
What tax will I have to pay if I buy a pension income?
If you buy an annuity/take income drawdown (leaving your pension pot
o You will only pay tax on the income
Anyone with total income below £10,600 in 2015-16 will not
How easy is it to pass on a pension to my dependants?
If you die before the age of 75, the pension pot can be passed on tax free.
If you die after 75, and your descendants want the whole pot as a lump
sum, they will have to pay 45% tax, instead of 55% previously.
Those who draw down income from an inherited pot will, in any case, pay
tax at their marginal rate.
What if I am in a Defined Benefit (DB) scheme - can I move to a DC scheme?
If your employer allows it
Transferring to a DC scheme means you could get your money out more
easily, and pass it on to descendants
But DB schemes usually offer inflation proofing, and the ability to pass
some of the income on to a spouse.
What are the new rules on how much you can save in a pension?
From 6 April 2016, the maximum you can have in a pension pot will be
£1m, reduced from £1.25m
Annuities provide a fixed income for the rest of your life
o The payments are guaranteed
The alternative is to keep your pension pot intact + "draw down" income
from it – as and when you need it
o In some circumstances it can provide a higher pension.
o But it is also much more risky.
"The benefits are better, because there's flexibility in terms of
the income you take year-on-year
E.g. Based on a £70,000 pension pot - and a 25% tax-free withdrawal - a
healthy 65 year-old man buying a single, inflation-linked, annuity could
expect an annual income of £2,389 on top of his state pension. If he wants
his partner to receive the same income after he dies, he might receive
o This assumes he also wants to take out his 25% tax-free lump sum
o Alternatively, should he decide to draw down a part of his pension
every year - leaving the rest of his pot invested in shares, bonds or
cash - he could get around £2,100.
This assumes he withdraws 4% of his pot in income every
year, and that his investments grow at an annual rate of 5%.
But if he lives past 100, he may have to reduce the amount
he takes, to maintain the capital in the fund
The main advantage of such policies is their flexibility,
which may work particularly well for people who
continue to work part-time.
Payments continue for life
Money could run out
Can be enhanced, if medical condition
No enhancement option
Cannot be passed on to descendants
Unused portion can be passed on
Can be adjusted for inflation
Pot should grow by more than inflation
Unaffected by market falls
Income at risk from market fall
Suitable for any size pot
Not advised for pots below £30,000
Should I buy an income drawdown policy?
Until 6 April, the amount you can take from a drawdown account is limited,
or capped - unless your pension income already exceeds £12,000 a year.
After that date, everyone will be free to withdraw what they like.
From April too, your descendants will be able to inherit the unused part of
your pot more easily.
But the danger is that your savings could dwindle more quickly than you
expect - particularly if the stock market crashes.
o In other words, you could run out of money, especially if you live
longer than you expect.
Some advisers suggest only taking the "natural" yield of investments
instead, to preserve the capital value of the pot. That probably means
taking an income of around 3.5%.
Beware the charges too. You could easily lose 5% of your savings, just to
set the scheme up.
Should I buy an annuity?
Yet an annuity may still be the best product if you want a secure income
for the rest of your life. And it will almost certainly be the best product if
you are ill, or have shortened life expectancy, which enables you to buy an
A heavy smoker buying an enhanced annuity could easily see their annual
pension increase by a third. Heavy drinkers, or those with high blood
pressure, will get a higher income still.
But the following options will reduce the size of the pay-out:
o If you want the pension to pay out for a guaranteed period, say five
or ten years, if you die early (guarantee)
o If you want your partner to receive an income after your death (joint
o If you want your income to rise with inflation (inflation-linked)
But looked at another way, buying an ordinary annuity is a risk in itself - if
you or your partner die early, you won't get your money back.
And if inflation is lower than expected, you might have overpaid for an
annuity which rises with the cost of living.
So what are the potential hidden consequences?
1. New pensioners blow their savings
Some people might decide that their pension pot, locked up during their
working life, will provide a nice lump sum to use to celebrate retirement
with a holiday of a lifetime, a massive party, or a Lamborghini sports car.
But it will be clear to all that in doing so, they take away the option of
using those savings when money is tight in retirement, especially if they
underestimate how long they will live for.
The new flat-rate state pension will provide just over £7,000 a year of
income to fall back on - described by the chancellor as "generous", but
much lower than the vast majority of people are used to during their
working life. At times, individuals will receive this, years after they have
access to their defined contribution pension pot.
2. House prices rise
Freed of the need to put their pension savings into an annuity, new
pensioners may decide to use the money to invest in property instead.
"With pensioners no longer being railroaded into investing in annuities,
they will be looking for other higher-yielding investments - that inevitably
means a huge boost to buy-to-let investments.
"Unfortunately, it is often the case that the higher the yield, the higher the
3. Older people get a shock tax bill
Anyone who decides to take all their money in one go will not escape the
The money will be categorised as income, and so will be subject to income
tax. Anyone taking out a large amount in one go might find 40% income
tax is levied on some of it.
Instead, retirees might decide to take it out in small chunks over the
years, stick with an annuity, or seek advice for tax planning.
4. Con artists rub their hands with glee
Rogue operators will know that catching someone just as they have access
to their pension pot could be very lucrative. The advice, as always, is that
a deal that looks too good to be true usually is, and that no decision needs
to be taken immediately.
5. Existing pensioners feel left out
This Budget was dubbed as a victory for pensioners, but this new flexible
arrangement will not be available to most existing pensioners at all.
The new system is planned to be introduced fully in April 2015, but only
for the 320,000 or so who retire each year with a defined contribution
Those who have already bought an annuity are receiving their annual
pension income and are locked into that deal for the rest of their life.
If this annuity was bought in the past few years, the likelihood is that it
was not a very good deal, because of economic conditions and monetary
policy. So the recently retired may feel as though they have missed out on
greater choice and better deals.
6. Remaining annuity deals are less generous
Millions of people are being signed up to defined contribution pensions,
through the automatic enrolment workplace pension scheme.
7. The Bank of Gran and Grandad opens for business
The amount of money tucked away in pension pots might not be very big not enough, as mentioned earlier, for most to buy a property.
Yet, a significant chunk of cash could be used as a loan to grandchildren
who are struggling to get on the housing ladder, or facing the cost of
paying for further education.
However, as explained earlier, taking out a big chunk of money in one go
will probably lead to an income tax charge for Gran and Grandad.
8. Inheritance tax becomes a bigger issue
When you buy an annuity, your pension pot is spent on an annual income
that lasts for as long as you live. The longer you live, the better value for
money it is.
As a result, insurance companies selling annuities are making a calculation
or bet based on how much longer they think you will live. Smokers and
those with health problems can get a better deal, owing to the shorter life
When you die the income generally ends, so cannot be claimed by your
Under the new rules, a pension pot can be taken as cash, become part of
your estate, and be passed on to your children. However, unless it is
invested in a way that avoids inheritance tax, it could push the assets left
in a will over the £325,000 threshold that means inheritance tax will be
9. The mis-selling threat picks up again
Millions of people will still save for retirement in a pension organised by an
insurance company. This company will have your money and will try to
encourage you to use it to buy one of their products when you reach
Clearly, there is nothing wrong in that, although it might not give retirees
a clear picture on whether it is a good deal. With lots of financial firms
wanting to get hold of that money, there is a danger of a minority of them
overstating what is being offered.
The sector is regulated, giving individuals the opportunity to challenge and
win compensation if they are mis-sold a product.
The government is also making it a requirement that retirees receive some
guidance from their pension company, but it is not clear whether this will
be impartial or free.
10. Companies lose a source of credit
The vast majority of annuity money is invested in bonds, which flows
through to businesses.
If the annuities market were to collapse, then this would reduce this
supply line of credit to companies, the BBC's business editor Robert Peston
That could make businesses more dependent on banks for credit once