Pensions Freedom. What do the pension changes really mean? This is for information purposes only.

Pensions Freedom What do the pension changes really mean? This is for information purposes only.

Pensions Freedom March Budget 2014 introduced unprecedented changes to how pension benefits can be taken Increases your options in retirement But the fundamental planning is still the same to provide an income for your lifetime

How long will I live? Have a think What age do you think that you will live to? You will see from the next few slides the huge difference we have seen in life expectancy over the last century.

Happy 100 th Birthday! In 1917 The Royal Household sent? Telegrams In 1952 The Royal Household sent? Telegrams In 2011 The Royal Household sent? Telegrams In 2035 The Royal Household predict? Telegrams Source: www.royal.gov.uk and Office for National Statistics

Happy 100 th Birthday! In 1917 The Royal Household sent 24 Telegrams In 1952 The Royal Household sent? Telegrams In 2011 The Royal Household sent? Telegrams In 2035 The Royal Household predict? Telegrams Source: www.royal.gov.uk and Office for National Statistics

Happy 100 th Birthday! In 1917 The Royal Household sent 24 Telegrams In 1952 The Royal Household sent 255 Telegrams In 2011 The Royal Household sent? Telegrams In 2035 The Royal Household predict? Telegrams Source: www.royal.gov.uk and Office for National Statistics

Happy 100 th Birthday! In 1917 The Royal Household sent 24 Telegrams In 1952 The Royal Household sent 255 Telegrams In 2011 The Royal Household sent 9,736 Telegrams In 2035 The Royal Household predict? Telegrams Source: www.royal.gov.uk and Office for National Statistics

Happy 100 th Birthday! In 1917 The Royal Household sent 24 Telegrams In 1952 The Royal Household sent 255 Telegrams In 2011 The Royal Household sent 9,736 Telegrams In 2035 The Royal Household predict 110,000? Telegrams Source: www.royal.gov.uk and Office for National Statistics

Life Expectancy Life expectancy for male and females at age 65

Income for Life How much income will I need in retirement? Single Tier Pension from 2016 will be around 7,800 per annum How long will I live? So how much do I need to save?

Different Types of Pension Final Salary Pension Scheme Amount of pension a proportion of salary at retirement For example, income of 30,000 at retirement, 30 years service, in a 60ths scheme 30/60 x 30,000 = 15,000 per annum New pension freedom rules do NOT apply to final salary schemes

Different Types of Pension Money Purchase Pension Scheme Personal Pensions Pension contributions are invested And a fund is available at retirement to provide an income in retirement The new pension freedom rules apply

Summary of the Changes Saving for retirement Retirement Age Choices at retirement How do I choose?

Saving for Retirement

Retirement Age Minimum retirement age to remain age 55 Will increase to age 57 in April 2028 Thereafter the minimum retirement age will remain 10 years below the State Pension Age

Choices in Retirement

Flexi Access Drawdown

Annuity or Drawdown?

Flexi Access Drawdown Can draw a regular income Can take the whole fund in one go 25% tax free The rest taxable at your marginal rate of tax My what??

Example: Flexi Access Drawdown & Tax Tom age 60 has income 31,200 and pension fund 120,000 he has only ever benefited from basic rate tax relief on his pension contributions Tom s tax liability for 2015/16 on his income of 31,200 will be as follows: Personal allowance 10,600 0 20% on 20,600 4,120 Total tax 4,120

Flexi Access Drawdown & Tax Tom decides to fully access his pension and receives 30,000 of tax free cash. The 90,000 income withdrawal increases total income to 121,200 and his tax liability is now: Personal allowance 0 0 20% on 31,785 6,357 40% on 89,415 35,766 Total tax 42,123 Increase due to pension withdrawal 38,003 Effective rate on 90,000 42.2%

Flexi Access Drawdown & Tax Tom could instead take: The tax free cash only on 30,000 And then smaller amounts of taxable income each year within the basic rate tax band. Eg 11,185 in 2015/16 Income 31,200 Plus Pension 11,185 42,385 Less Personal All 10,600 31,785 (basic rate tax band)

Uncrystallised Funds Pension lump sum A new way to take a lump sum from your pension An alternative to drawdown Take the lump sum direct from your pension fund With 25% free of tax, and the remainder taxable at your marginal rate

New Money Purchase Annual Allowance You can currently pay up to 40,000 a year into your pension Although this can be increased by carrying forward any unused annual allowance from the previous 3 tax years If you flexibly access your pension from 6 April 2015, you will reduce this allowance to 10,000 with no carry forward Need to take care when taking any pension benefits that you may be restricting future contributions

Pensions and Income tax planning Jason is age 60 and runs his own business He has profits of 100,000 to take He is a higher rate tax payer And the company pays corporation tax at 20% So, income is taxed at 40%, employee national insurance is 2% and employer national insurance is 13.8%

Pensions and Income tax planning Method of Taking Profit Amount After tax Effective Rate of Deduction Dividend 60,000 40% Salary 50,967 49% Pension contribution 100,000 0%** ** 25% free of tax, and remainder at marginal rate when taken

Pensions and Income tax planning Sheila is age 65 and about to retire Pension fund is valued at 200,000 And she has a State Pension of 5,500 pa Best annuity available is 8,900 + tax free cash of 50,000 Total income is 14,400 and income tax is 760 Using drawdown she could take: Tax free cash of 3,800 and taxable income of 5,100 Total income is 14,400 and income tax is NIL

The Next Generation Death Benefit Planning Changes to the rules from 6 April 2015 Member dies before age 75 Whole fund available as a tax free lump sum Set up a drawdown for the beneficiary with all income and/or lump sums free of tax Use the fund to buy an annuity, with all income payments free of tax

The Next Generation Death Benefit Planning Changes to the rules from 6 April 2015 Member dies on or after age 75 Whole fund available as a lump sum less 45% tax Set up a drawdown for the beneficiary with all income and/or lump taxable at marginal rate Use the fund to buy an annuity, with all income payments taxable at marginal rate

The Next Generation Death Benefit Planning For example John is age 65 and has a pension fund of 300,000 after tax free cash has been taken He is married to Mary and has 2 grown up children

The Next Generation Death Benefit Planning

Summary Changes make a pension the first consideration for an investment Considerable flexibility to access benefits as and when required from the minimum retirement age Can mix tax free cash and taxable income for income tax planning Can pass on any unused funds on death to the next generation