A guide to the pension changes in April 2015

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1 A guide to the pension changes in April indd 1 05/01/ :00

2 Contents What do the changes mean for you? 3 Summary of the changes from 6 April What s changed in practice? 6 How your income drawdown pension death benefits are taxed 8 The importance of getting sound financial advice 10 Jargonbuster 11 2 A guide to pension changes April 2015

3 What do the changes mean for you? In the 2014 budget, the chancellor announced unprecedented changes which mean you now have more freedom in how and when you access your pension funds. Pensions can seem complicated and with the new choices available, it s never been more important to talk about your options with your financial adviser. We ve highlighted any terms you might want to read more about in our Jargonbuster at the end of this brochure. The changes apply to money purchase pension funds. You may have heard the changes being described as your pension fund working just like a bank account. Or about being able to take out any amount of money whenever Here are the top three things people aged 55 and over enjoy most about retirement: 1 More time to do what they want (66%) 2 Spending time on hobbies (45%) 3 Travelling (41%) Source: Aviva Real Retirement Report, Autumn 2014 you want. This might sound very appealing after you ve worked for many years, investing money in your pension. Wouldn t it be great to access all the money you ve put away? In reality, it may not be quite that simple. It may be good to go on a holiday of a lifetime, buy a car or clear some debt, but there are other things you need to think about. People aged over 75 spend the most on their household bills, with 43% spending between 101 and 250 a month on bills. Source: Aviva Real Retirement Report, Spring Between 2011 and 2013, people aged 65 could expect to live for a significant number of years. Men 18.3 years Women 20.8 years Source: ONS National tables UK, aviva.co.uk 3

4 Think about all the angles When you re paying into your pension fund, the whole idea is it will give you an income in retirement. So it s important you consider these questions: What level of income do I need once I retire? How will I fund my retirement income? Will the amount of income I need change over time? For example, what if I need long-term care later in my life? How healthy am I? Do I expect to live a long time after I retire and so need my income to last longer? Will the state pension cover my income needs if I use my pension fund for something else? Will I be able to pass money to my children? Would I prefer to have a guaranteed and secure income? What other sources of income could I use if I start to run out of money? Make sure you understand the tax implications As well as considering the questions on the left, it s important to understand how you ll pay tax on the income from your pension fund. The government has changed the way it taxes pension benefits and the amount of tax your beneficiaries will pay on any pension lump sum left when you die. It s vital you discuss your personal situation with your financial adviser so that you make the right choices. Taking your entire pension fund as cash could tip you into a higher income tax bracket for that year, meaning you will have to pay more tax. Paying more tax will leave you with less cash in your pocket. It s important to talk to your financial adviser. 4 A guide to pension changes April 2015

5 Summary of the changes from 6 April 2015 What s new? Changes to income drawdown The detail Flexi-access drawdown replaces capped drawdown and flexible drawdown, providing more flexibility. If you re already in capped drawdown, you can stay in it as long as you don t exceed the income levels set by the government (GAD limits). If you go over the limits, you ll automatically move into flexi-access drawdown, which will reduce your annual allowance from 40,000 to 10,000. You should discuss your situation with your financial adviser. You can take all or part of your pension fund as cash on or after your 55th birthday You can still take up to 25% of your pension fund tax free. You ll pay income tax at your marginal rate on the remaining fund as and when you withdraw it, whether you take it as a lump sum or as an income. If you re already in capped drawdown, you will have to ask your provider to convert you to flexi-access drawdown to take advantage of the changes. If you re in flexible drawdown, your provider will automatically convert you to flexi-access drawdown, so you don t need to do anything. In both cases, there may be tax implications for your future contributions and the amount of income you take. It s worth discussing this with your financial adviser to make sure you re making the right choice. At the moment, there are restrictions on when you can enter capped drawdown and flexible drawdown. These restrictions will disappear from 6 April Changes to the tax your dependants will pay on income drawdown pension lumps sums when you die Uncrystallised funds pension lump sum now an option on some products The government has changed the way you can pass on funds when you die, giving much more freedom. We explain this more on page 8. Also the 55% tax charge has been completely removed for those under 75 and reduced for those aged 75 or over. We explain this in more detail on page 8. Some products may offer you this new option. With this, you won t pay income tax on 25% of each income payment you get. You ll pay tax on the rest of each payment at your marginal rate of tax. aviva.co.uk 5

6 What s changed in practice? Before Rules before 6 April 2015 Your pension fund (excluding state pension) Trivial commutation If you re 60 or over with total pension funds of 30,000 or less, you can take them as one lump sum. You can take 25% tax free, but you ll pay tax at your marginal rate of tax on the rest of the money. Small pension pots If you re 60 over, you can take up to three pension pots worth up to 10,000 each as cash. You can take 25% tax free, but you ll pay tax at your marginal rate of tax on the rest of the money. Options with any remaining pension funds You can take up to 25% cash tax free. Capped drawdown This lets you take an income from your pension fund. The government sets the maximum amount you can take. This limit is designed to help protect you from running out of money and is called the GAD limit. If you already have capped drawdown, you can keep it as long as you stay within the GAD limit. There are tax implications if you go over the GAD limit or if you decide to convert from capped drawdown to flexi-access drawdown. In each case, your 40,000 annual allowance might reduce to 10,000 if you move from capped drawdown to flexi-access drawdown. So make sure you get financial advice. or Flexible drawdown There s no limit on how much you can withdraw, but you have to prove you have a guaranteed income of 12,000 a year or more from other sources. This can include any state pension. or Annuity You can buy an annuity with your pension fund. It gives you a guaranteed income, usually for the rest of your life. After Rules after 6 April 2015 Trivial commutation This option is no longer available for money purchase schemes, from 6 April 2015 you ll be able to withdraw any amount. Small pension pots If you re 55 or over (or sometimes earlier if you re in ill health), you can take a maximum of three pension pots of up to 10,000 each as cash. You can take 25% tax free, but you ll pay tax at your marginal rate of tax on the rest of the money. This won t affect your annual allowance. Options with any remaining pension funds You can take up to 25% cash tax free. Flexi-access drawdown You ll be able to take up to 25% tax-free cash. This lets you take any amount from your pension fund whenever you want, even if you want to take everything at once. You ll pay tax on your income at your marginal rate of tax. You ll need to make sure you don t run out of money in your retirement. Your financial adviser can help you plan for the future. In some circumstances moving into income drawdown could reduce your annual allowance. Your financial adviser will tell you if you are affected. or Uncrystallised funds pension lump sum payments (UFPLS) This lets you take an income from your pension fund. Every time you get an income payment, you ll get 25% of it tax free, but you ll pay tax at your marginal rate of tax on the rest of the payment. Not all products offer this option. or Annuity You can buy an annuity with your pension fund. It gives you a guaranteed income, usually for the rest of your life. 6 A guide to pension changes April 2015 aviva.co.uk 7

7 How your income drawdown pension death benefits are taxed If benefits are taken before 6 April 2015 If you re in income drawdown and you die before 6 April 2015, your dependants can choose one of these four options: Continue receiving the income drawdown payments. Buy an annuity. Take the remaining pension fund as a lump sum, paying the 55% tax charge if the lump sum is paid before 6 April Defer taking benefits until after 6 April If you die before your 75th birthday, your dependants won t pay any tax on the funds you haven t yet taken any benefits from unless they exceed the Lifetime Allowance. These are known as uncrystallised pension funds. If your current dependants are no longer dependent when you die, the only option would normally be paying out a lump sum to a beneficiary. This would be at the pension fund trustees discretion. If benefits are taken after 6 April 2015 From 6 April 2015, the government will completely remove the 55% tax on pension death benefits for people aged under 75 and reduce it for those aged 75 or over. This is good news if you want to pass on pension benefits when you die. This extra flexibility is a good incentive to invest into a pension fund. If you die aged 75 or over, your beneficiaries will pay tax on any income they get from your pension fund at their marginal rate of tax. Alternatively, your beneficiaries could take the pension fund as a lump sum, but they would pay 45% tax on this until 5 April From 6 April 2016, your beneficiaries will pay tax on the pension fund at their marginal rate of tax. Leave your pension benefits to beneficiaries not just dependants You ll notice we talk about beneficiaries here rather than dependants. That s an important change from 6 April From that date, you ll be able to pass your pension death benefits on to named beneficiaries rather than just dependants. Your beneficiaries will be able to pass the benefits on to their beneficiaries and so on. 8 A guide to pension changes April 2015

8 Passing your pension benefits to your beneficiaries from 6 April 2015 and beyond a summary If you die before your 75th birthday Income drawdown pension benefits Income Lump sum No tax charge If you die on or after your 75th birthday Income drawdown pension benefits Lump sum Income Taxed at 45% from 6 April 2015 to 5 April 2016 then at the beneficiary s marginal rate of tax Taxed at the beneficiary s marginal rate of tax aviva.co.uk 9

9 The importance of getting sound financial advice The new flexibility means you have much more choice over what you do with the money in your pension fund. You can choose from: having the security of an annuity taking money out of your pension fund as and when you want to - even all of it leaving your money invested and drawing an income from it over time a mixture of these options. Making the right choices for you will depend entirely on your personal circumstances, your retirement goals and your needs. You ll want to get the most from the new pension freedom. But at the same time you need to make sure you get through retirement comfortably without running out of money. You also need to think about the tax implications of your choices. You may have heard about the Guidance Guarantee. This government initiative offers free pensions guidance either: - face to face through the Citizens Advice Bureau - on the phone through the Pensions Advisory Service, or - online at gov.uk The guidance given will be very basic and we strongly recommend you discuss the options in detail with your financial adviser. It s important to remember the value of an investment and any income from it can go down as well as up. You may not get back what is invested. You should also bear in mind current tax laws and pension legislation can change. Making the wrong choice could have serious consequences and you may not be able to change your mind. So make sure you talk the options through with your financial adviser. 10 A guide to pension changes April 2015

10 Jargonbuster Annual allowance Annuity Beneficiary Capped drawdown Dependant This is the maximum amount you can pay into your pension fund that will qualify for tax relief. You can buy an annuity with your pension fund. It pays a regular guaranteed income, usually for life. Any named person you wish to pass your pension fund on to. This type of income drawdown has a limit on how much income your can draw from your pension fund. The government sets the limit. A dependant is your spouse, civil partner or someone who is financially dependent on you when you die. If the dependant is your child, they will only be considered a dependant until they reach the age of 23. Final salary scheme Flexi-access drawdown Flexible drawdown GAD (Government Actuary Department) limit Income drawdown A final salary (or defined benefit) pension scheme guarantees a fixed income when you retire. The income is based on your salary at the point you leave the company and how many years you have paid into the scheme by the time you retire. Flexi-access drawdown allows you to take as much money as you like, when you like. Flexible drawdown currently allows you to take as much income as you like each year. To qualify, you must be able to prove you have at least 12,000 a year in income from other guaranteed sources. This is the maximum level of income you can take from capped drawdown. It s set by the government. This is where you leave your pension fund invested and take (or draw down) an income from it. Lifetime allowance This is the maximum amount of tax-privileged pension savings that an individual can build up - currently 1.25m. Marginal rate of tax Money purchase scheme Pension fund Small pension pot Trivial commutation Uncrystallised funds pension lump sum (UFPLS) Uncrystallised pension fund You will have to pay income tax on any income received above your personal allowance. Marginal bands mean you only pay the specified tax rate on the portion of income that falls into that band. For example, if your income puts you in the higher rate tax bracket, you ll only pay higher rate tax on the part of your income in that income tax band. You ll pay the appropriate lower rate of tax on the rest of your income. Money purchase schemes build up a pension fund you can use to provide an income in retirement. These are also known as defined contribution schemes. This is the amount you build up over time to give you an income in your retirement. If you re 60 or over before 6 April 2015 or 55 or over after 5 April 2015, you can take a maximum of three pension funds worth up to 10,000 each as a single lump sum. The first 25% is tax free, but you ll pay tax at your marginal rate of tax on the rest of the money. If you re 60 or over with total pension funds of 30,000 or less, you can take them as one lump sum. The first 25% is tax free, but you ll pay tax at your marginal rate of tax on the rest of the money. This is a new option that may be available to you through some products. For each income payment you receive, you ll get 25% of the payment tax free and pay your marginal rate of tax on the rest of it. A pension fund you have not used for income drawdown or to buy an annuity. aviva.co.uk 11

11 Aviva Life Services UK Limited. Registered in England No Rougier Street, York, YO90 1UU. Authorised and regulated by the Financial Conduct Authority. Firm Reference Number aviva.co.uk LF /2015 Aviva plc

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