Pensions: Changes happening fast and furious. What pension changes are coming to effect

In years gone by when most new Pension legislations came in there usually was quite a long period before the implementation, giving us time to comprehend them and advise clients of the implications. However the times we live in today is unprecedented and the coalition has felt the best way forward to resolve the countries current predicament, is to make radical changes including Pension Legislation.

The Pension legislation reforms were announced on the 9th December, with many of them coming into effect on the 6th April, which gives little time to digest them. What I will try and do is put these in plain English and try to help the layman to understand them. The first change is to the annual allowance, this is the amount a person can invest into their pension and enjoy tax relief on.

The current rules are that you can enjoy tax relief on a maximum of £255,000, subject to a number of other factors. This is going to reduce to £50,000 from 6th April 2011 together with the Lifetime allowance reducing from £1.8m to £1.5m from the 6th April 2012.

One of the major changes is to ‘unsecured pensions’ or ‘income drawdown’; moving forward we will have ‘drawdown’ and ‘flexible drawdown’. Drawdown will have similar rules to its predecessor, apart from the maximum level of income you can take from it will be capped at 100% of the prevailing annuity rate, this will be subject to income tax and the income levels will have to be reviewed every 3 years, this is currently 5 years.

Flexible drawdown will also be available to anybody over the age of 55 and as long as they have a secured pension income of over £20,000pa. They will be allowed to withdraw levels of income higher than the capped level as in drawdown from the pot, but again subject to income tax. Neither the Drawdown or Flexible drawdown ceases on the 75th birthday. This means the rule to take an annuity at this age will cease. This is a major change as the annuity’s rule was brought in over 30 years ago. The other change to both are the death benefits; the current rules are on death of the individual, if the funds are taken in the form of a lump sum there is a 35% tax charge, this is going to increase to 55%.

Taking Pension Income is becoming more and more complex, every individual has the right to exercise the Open Market Option, which means they don’t have to take the annuity from their current pension provider. However, although the Government has taken many steps to encourage people to seek advice many don’t. It was reported that in 2009, a male and female about to purchase a fixed income annuity can increase their annual income by an average of 19% and 22% respectively, just by switching from the lowest to the highest paying provider.

If you are approaching retirement and wish to find out more about your Pension options, please contact us for a free without obligation consultation.