The budget was full of surprises in terms of changes to UK pension legislation. The changes affect the benefits that can be taken from a registered pension scheme as drawdown pension income and also as taxed lump sums. They amount to a radical reform of pensions in that they will offer much greater flexibility to individuals with different priorities, needs and circumstances. These changes include:
- There will no longer be an obligation to purchase an annuity on retirement.
- Those over 60 with small pension pots of up to £10,000 may release these savings as one or more trivial commutation lump sum
- The number of such lump sums that can be taken under the revised regulation will be increased to three i.e. a combined trivial commutation lump sum total of 3 X £10,000 = £30,000
- The minimum threshold for the flexible drawdown of pensions will be reduced to £12,000
Expatriates who opt to leave their pension in the UK are no longer required to have a minimum guaranteed pension of £20,000 per annum before being able to take advantage of flexible drawdown. With the new minimum threshold being reduced to £12,000 many more will be eligible for flexible access to their drawdown pension on or after 27 March 2014.
It is not all ‘roses’ however; there is still the thorny issue of taxes to be paid should individuals decide to take their total pension as a lump sum. This may include exposure to IHT taxes in the UK.
Temptation – I can’t resist
Spend, spend, spend! The most obvious temptation is for individuals to dip into their pension and overspend as a result of this new liberalization. Can we trust ourselves to make the best choices? With life expectancy increasing by 2 ½ years every decade, individuals recognize the need to make their pensions last. They are not going to rush out and blow their pension pot on cruises or fast cars.
Insurance companies have been offering extremely unattractive annuity rates to date. Under the new legislation, individuals can now put off buying an annuity until the rates become more favourable, or seek alternative vehicles for their pension savings. These new rules will therefore allow people to be more in control of their retirement planning.
Impact of the budget on QROPS
There will be an Increase in the maximum income that can be accessed via the pension drawdown facility from 120% to 150% of basic rates, calculated by the Government Actuarial Department. This is indeed good news for those who seek to draw more income from their QROPS. Let’s not forget that UK pensions transferred to a QROPS can grow free of tax and also fall outside of your estate for IHT purposes.
Over the coming days the implications of the new rules on QROPS will become much clearer; stay tuned!