Following a recent consultation* the UK Government has created measures to make the pension framework more flexible to the benefit of individual policy holders. This article specifically highlights the rule changes that affect defined contribution schemes. Also available are articles on the general UK pension rules for 2015 and the new UK pension rules for defined benefit (final salary) schemes. The new rules and amendments are as follows;
Rules limiting how much income can be withdrawn from a pension pot after an individual reaches state retirement age (currently 55) are to be abolished
You will be free to withdraw funds as and when you like subject to paying your marginal tax rate (i.e. your pension withdrawal is added to the rest of your income and charged tax accordingly).
A permissive statutory override will be effected to ensure all defined contribution schemes offer the increased flexibility of the new pension rules
This allows existing pension schemes to follow the new tax rules rather than their existing rules if they wish to do so. It is designed to prevent certain schemes being burdened with high administrative and legal costs associated with amending their rules.
If a pension scheme does not allow flexible access then you the right to transfer your accumulated savings pot
You have the opportunity to transfer to a pension scheme that offers full flexibility prior to retirement without the move being blocked.
Individuals will be permitted to transfer between defined contribution schemes up to a schemes normal retirement age
In theory this should allow all pensions to be amalgamated thereby potentially providing the maximum choice in the Open Market Option (OMO) as, in certain instances, providers have minimum thresholds. The OMO states that individuals are free to search for the best provider on retirement. For example, a person does not have to choose an annuity with the company that holds their existing pension if it is in anyway detrimental to to do so.
New tax rules will be implemented to prevent income tax avoidance
At present, using the new pension flexibility rules would allow those over 55 to pay all their income into a pension then fully withdraw it immediately. This would result in only 75% of an individual’s current salary being subject to income tax (they would benefit from the 25% tax free pension commencement lump sum). As it would amount to tax avoidance rather than tax evasion it would be legal. This loophole is therefore intended to be closed prior to April 2015.
Individuals will be entitled to free impartial advice on their retirement options
Anyone nearing retirement will be entitled to free financial advice, including face to face, if required. The information provided must be genuinely impartial and not recommend specific products or providers. The cost of this will be borne by a levy on firms likely to benefit from the advice.
*Source: HM Treasury – Freedom and choice in pensions: government response to the consultation