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Change is coming. Budget 2014 heralded a shake-up of the pension system that will change how we can save for the future through our pensions and how we can take our money out. The changes won t come until April 2015 so it s still handy to have an understanding of the current position. This guide will give you an idea of how things stand at the moment and an introduction to what s going to change in April 2015. For more detail on the changes in April 2015 have a look at our guide Let s talk pension flexibility - the future. We ve also got our guide Let s talk pensions the basics which can give you a summary of the different types of pensions out there and how they work. The following information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.
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Types of pension 1 Not all pensions give you the same options. So before we start looking at your options, it s worth going over the differences between defined contribution pensions and defined benefit pensions. Defined contribution pensions are sometimes called money purchase pensions. How much you ll be paid from one of these depends on how much is paid into it, for how long and how well the investments have done. You can have a defined contribution pension that you set up or one that your employer set up for you. Defined benefit pensions, or final salary or salary related pensions are set up by employers and will pay you a set amount each year. How much this is will depend on factors like your salary and how long you were in the pension. 04 Let s talk pension flexibility the current position
Taking money out 2 Lifetime Allowance (LTA) This is a tax allowance that limits the total amount you can amount you can take from your pensions. The Lifetime Allowance for most people is 1.25 million in the tax year 2014-15 (reduced from 1.5 million in 2013-14). It applies to the total of all the pensions you have, including the value of pensions promised through any defined benefit schemes you belong to, but excluding your State Pension. If the cumulative value of the payouts from your pension pots, including the value of the payouts from any defined benefit schemes, exceeds the Lifetime Allowance, there will be tax on the excess - called the Lifetime Allowance charge. If you think you might be impacted by the LTA you should speak to an adviser. Tax Free Cash and Annuity Many people will choose to take tax free cash from their pension. This will generally be up to 25% of your pension pot. If you ve got a Defined Contribution pension, you can use the rest to buy a fixed income. For some people this could be the right thing to do. Before deciding if it s right for you, it s important to make sure that it will meet your needs for the rest of your life. And you will have to remember that if you do decide to buy a fixed income, you won t be able to change your mind later on if your needs change. There are other options if you would like more flexibility and these are covered later in this guide. Let s talk pension flexibility the current position 05
Taking money out (continued) 2 Taking a lump sum - Triviality If you re 60 or older, with total pension savings and benefits of 30,000 or less, you can take the whole amount as a lump sum now. Up to 25% of that can normally be paid tax-free with the balance taxed as income. From April 2015, triviality will only apply if you are 55 or older and in a defined benefit pension. If you have a defined contribution pension that offers the new options you ll be able access the whole amount as cash if you are 55 or older. Taking a small pot If you re age 60 or older, you can take up to three personal pension pots (and unlimited workplace pensions if the rules of the pension allow it) worth up to 10,000 each as a lump sum regardless of the value of your total pension savings. Again, up to 25% of the lump sum can normally be paid tax-free with the balance taxed as income. From April 2015 you will have this option if you are age 55 or older. Taking an income An alternative to purchasing an annuity is to leave your pension invested, and take a portion of the pension pot each year as an income. Currently you ve got two ways to get this income; capped income drawdown and flexible drawdown. 06 Let s talk pension flexibility the current position
Capped Income Drawdown Currently, there are government limits (known as Government Actuary Department, or GAD limits) on how much income you can withdraw each year. If you re choosing drawdown for the first time, your maximum income will be 150% of the pension calculated from the GAD rate tables. The old maximum was 120%. However, from April 2015, thanks to new pension freedom rules, you should be able to draw as much as you like. Flexible drawdown Flexible drawdown, perhaps should really be called uncapped drawdown. It s a way of taking benefits from a pension without buying an annuity, which allows you to take uncapped amounts out of your pension. With flexible drawdown there is no limit on the amount of drawdown pension you can take each year. You can take as much or as little as you like. There is also no need for your pension fund to be reviewed to work out your maximum possible pension. However not everyone can take flexible drawdown. The yearly income you need to meet the minimum income requirements (MIR) to access Flexible Drawdown is 12,000 a year. And, currently with flexible drawdown you can no longer pay money into you pension. From April 2015 there is no MIR and you could be able to pay some money in. Let s talk pension flexibility the current position 07
What if you re not ready to take your money out yet? 3 So far in this guide, we ve focused a lot on how you can get your money out of your pension. But it s important to remember that the government encourages you to save for your retirement by giving you tax relief on money you pay in to a pension. This can be valuable for many and can help boost your pension savings. However, there is an overall limit on what can be saved into your pensions. If you save more than the annual allowance you may have to pay a tax charge on the excess. This limit is called the annual allowance and is currently 40,000. But your annual allowance may be zero if you re taking money out of your pension in certain ways. However this will change in April 2015. To get the most from your pension, you should pay as much in as you can for as long as you can, but get advice to make sure it s right for your circumstances. Embracing change Whether you re saving for your retirement, or about to retire, the changes announced in the 2014 Budget could give you more freedom, choice and flexibility than ever before over how you access your pension savings. 08 Let s talk pension flexibility the current position
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Need professional help? We would always recommend you speak to a financial adviser. Alternatively, from 6 April 2015, you can get free and impartial guidance. This service will be available from independent organisations. The Pensions Advisory Service and the Money Advice Service are two of the partners who will be involved in this. The service will be offered through a range of channels, including online, over the phone and face-to-face. We can help you further We hope you ve found this guide useful. This will be one of many as we tackle other useful financial topics. 3.7 million people in the UK trust us with their money. We ve been helping people to make the most of their money for 200 years, and we can help you too. There s more information on www.standardlife.co.uk or you can call us on 0845 606 0191. Calls may be monitored and/or recorded to protect both you and us and help with our training. Call charges will vary. Let s talk pension flexibility the current position 11
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