April 2015 will not only mark the start of a new tax year, but a new dawn for the pensions industry, with several changes being implemented that will have a significant effect on savers.
As well as having a bearing on people’s pensions and the amount they are capable of both investing and withdrawing, the changes will also have a major impact on the amount of tax that people are subject to pay, with some benefitting and others being detrimentally affected.
Flurry of changes
As outlined by Chancellor George Osborne in last year’s Budget, April 6th will combine pension freedom reforms with a number of tax changes, with savers able to pass on what is left of their pension pots to loved ones tax-free after death, due to the scrapping of the 55 per cent tax rate currently applied to funds left to children.
Now, beneficiaries will either pay tax at their own income level, with money received added to their earnings to calculate this, or there will be no tax to pay if the person who dies is under the age of 75.
Furthermore, wives or husbands whose partners die before reaching 75 will receive annuity income from their spouse’s pension tax-free, as announced by the Chancellor in his Autumn Statement.
In contrast, beneficiaries of so-called joint life annuities or other types that come with death benefits currently pay income tax on what is received.
Caution must be exercised, however, as over-55s looking to take advantage of new pension freedoms to withdraw large sums from retirement savings may be landed with large tax bills.
The temptation to take advantage of unrestricted access to an entire pension pot will be tempered by the fact that just 25 per cent of retirement savings will be tax-free, with the rest taxed as income, as is currently the case.
Workers who are accustomed to paying the basic rate of tax through employers may also fail to realise that dipping into their pension pot too freely could put them into the higher rate tax bracket.
Another key factor will be the changes to inheriting pension pots, which are expected to make using income drawdown to fund retirement and other ventures and investments far more popular, while once-coveted final salary pensions could also become less appealing.
Final salary schemes have been phased out by many employers due to the sheer cost of running them, with those lucky enough to have one warned against transferring out.
On the other hand, new tax advantages that fall in favour of income drawdown could have a major effect on the industry, as final salary income usually ceases on the death of the member and their spouse and cannot be passed on to their offspring.
Those who are considering transferring from a final salary to a defined contribution scheme that can be converted to an income drawdown on retirement should only do so after consulting expert advisers, and even then should think about the potential consequences.
Of course, the changes may all be for nought, depending on the outcome of the upcoming General Election.
Although Steve Webb has been the longest serving Pensions Minister ever, with the result being a degree of stability for auto-enrolment and pension reforms in recent years, the upcoming election could result in a change in political power and major alterations to the pensions industry.
As such, any and all decisions relating to pensions must be tempered by the possibility that the sector is subject to change. Those planning to spend or invest their money may be wise exploring all avenues before turning to their pension fund.