This year will bring in the biggest change to pensions in almost a century. From April 2015, government reforms will create new freedoms and tax benefits when people access pension savings from the age of 55.
These mean that people with defined contribution pension savings – and those who transfer defined benefit pensions savings to a defined contribution scheme – will be free to buy an annuity, take out all their pension savings in a lump sum or keep their pension pot invested and access it over time.
Savers will no longer have just one opportunity to take a tax-free lump sum worth 25 per cent of their pension pot, as at present. Instead they will be able to take out lump sums whenever they like, receiving the first 25 per cent of each withdrawal tax-free with the rest taxed as income at their marginal rate (the highest rate of tax they pay).
Other changes mean that people with a defined contribution pension who die before the age of 75 will be able to pass on unused pension to a beneficiary tax-free. Currently beneficiaries pay 55 per cent tax if they receive a lump sum from a pension where some money has already been taken out.
People with a defined contribution pension who die after the age of 75 will also be able to pass on unused pension to a beneficiary. When the recipient withdraws money from the fund, it will then be taxed at their marginal tax rate.
While these changes make pensions very attractive as a tax-efficient financial planning tool, experts are widely predicting that whichever party takes charge after the May 2015 general election is likely to cut tax relief on pension contributions, possibly to a flat rate of 20 per cent, to reduce an annual tax relief bill of almost £40 billion.
Currently, savers receive income tax rebates at their marginal rate – 20 per cent, 40 per cent or 45 per cent – on contributions of 100 per cent of earnings or a £40,000 annual allowance, whichever is lower.
Barristers may therefore have only a time-limited opportunity to pay into pensions and benefit both from current tax relief rates and from next year’s pension reforms.
Milsted Langdon’s Independent Financial Advisers can provide expert advice on all aspects of pensions and retirement planning, to help you clarify your options and make informed decisions to maximise retirement income. For more information, please contact us.