Cutting Through the UK Pension Budget Reforms

Since the Budget 2014 and the changes to the UK Pension Scheme, there seems to be much confusion from various angles. However the reforms are relatively simple when broken down, the significant changes will not be implemented until April 2015 after industry consultation. In the interim there will be some changes right away. Here we look at the changes which are scheduled for April 2015 and those which have been put into place:

Changes to UK Pensions with Immediate Effect

• Anybody aged 60 or over with up to £30,000 (formerly £18,000) will be able to withdraw the amount in its entirety and will receive 25% tax free with the remainder to face tax at marginal rates.
• If you currently have a ‘capped drawdown’ pension, this means you are taking some out each year. The amount you are able to access will increase from 120% to 150%.
• A pensioner with just £12,000 from alternative sources in secured pension income, will find they are able to make withdrawals without limitations using a method called ‘flexible drawdown’.
• Those with significant amounts in their pension savings will now be able to have as many as three separate pensions each worth £10,000 in cash. This was formerly limited to 2 pensions each worth a maximum of £2,000.
• Income drawdown will now be increased to allow a larger withdrawal, the exact figures are unclear currently however it is in the thousands apparently. Much depends on the exact amount saved.

Changes Proposed for April 2015

• Savers aged over 55 will have full access to their entire pension. 25% will be tax free with the rest subjected to marginal rate income tax if you choose to withdraw it.
• An 18 month period (formerly 6 months) will be introduced where you will have the option to decide whether to invest in an annuity or to enter into drawdown.
• Pensions will be able to be withdrawn in annual lump sums which can vary in terms of amounts to ensure the saver stays within tax limits.

In essence the reforms will provide more flexibility to the formerly rigid UK pension scheme. The tax regulations used to essentially force the hand of the saver to allow one choice and one choice only. This meant that they had to buy an annuity or face losing over half of their pension to income tax. Now the government are proposing to hand the power of choice back to the saver. An annuity is a good option for many, however those that require a lump sum for home improvements or debt repayment can now do this without fear of tax reprisals.

The impact on QROPS

While there has been speculation that the impact on those that have moved their pensions into overseas schemes will be negative in terms of benefit, QROPS do have to fall in line with any reforms within UK pension schemes. This means that QROPS are likely to be even more beneficial to those looking to benefit from living abroad while those that already have a QROPS in place will not be missing out because of the changes made back in the UK.

Right now the only uncertainty comes with the fact that the proposals are under consultation, and a clearer picture will not be visible until later on in the year. Whichever way these reforms are viewed, the benefits will be felt by both UK pension holders and those looking to move to QROPS.

Speculation is only natural within the early days of an announcement, however those that claim the QROPS industry may suffer as a result of increased benefits within the UK are significantly wide of the mark. If UK pensions are to offer increased benefits, QROPS will also offer increased benefits, that much is clear from the outset.