Some immediate pension changes

The budget saw some dramatic headline changes on the pension’s front, but some of these changes don’t come into play until next April 2015, partly to give pension providers time to adjust their systems and practices.

However, the budget did also see some significant changes which came into immediate effect.

This included changes which improved the income limits for those choosing 'income drawdown' instead of buying an annuity. These came into effect on 27 March 2014. 

Income drawdown allows you to take up to 25% of your pension tax-free as a lump sum and then leave the rest of your pension pot invested - taking an income directly from it, instead of using the money in your pot to buy an income via an annuity.

This means you keep control of your pension, in terms of where to invest and how much income to draw. However, unlike an annuity, which is secure and guaranteed for life, income drawdown is not secure and income can rise or fall.

There are two types of income drawdown – capped, which means that there are limits on how much you can take out each year - and flexible, where you can take out as much as you like, provided that you meet certain conditions. 

Under capped drawdown, income drawdown investors are given a yearly limit to the income they can draw. With effect from 27 March 2014, this has increased from 120% to 150% (compared to the corresponding annuity rate). This means you can now choose to take more money from your pension pot each year, assuming your scheme rules allow it. 

Flexible drawdown rules have also been relaxed. Flexible drawdown permits investors to make uncapped, unlimited withdrawals from their pension pot, subject to strict qualifying criteria. Currently, you need a secure pension income of at least £20,000 a year in place (including any state pension). However, from 27 March 2014 this limit has reduced to £12,000, which means significantly more investors will be able to qualify.

Finally, from 27 March 2014, investors aged 60 or over with less than £30,000 in total pension savings will be allowed to take the whole lot as cash. The first 25% will be tax free, with the rest taxed at your marginal rate.    

Investors with individual pension pots smaller than £10,000 will be allowed to cash in up to three pensions of this size. Again, the first 25% will be tax free, and the rest taxed as income – but some restrictions will apply.

The new rules represent a call to action for many coming up to retirement, as well as those in their 40s and 50s, for whom the rules have now changed. Some may need to re-appraise their investment strategy, whilst others may need more immediate advice on the implications of the new changes and how to deal with them.

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