Radical pension changes, effective from April 2015

12 Sep 2014

The government has announced subject to consultation radical pension changes, effective from April 2015, whereby investors will have unprecedented freedom over how they take money from their pensions.

From April 2015 pension investors aged at least 55 will have more freedom over how they take an income from their pension.  They could take all the fund as a lump sum if they so wish.  They will then be able to spend, invest or save it as they choose.

The first 25% will be tax free.  The rest will be subject to income tax at their highest marginal rate.  So for a basic rate (20%) taxpayer, any income they draw from their pension will be added to any other income they receive (e.g. salary) and this could push them into the higher (40%) or even top-rate (45%) income tax bracket.  So careful pre-retirement planning is essential.

It will also be possible to choose to take the pension out in stages, rather than in one go, which could help them manage their tax liability.  It should be possible to take the tax-free cash straightaway and the taxable income at a later date.  These two useful strategies are not new, advisors have used them for some time.

The logic of using pensions contributions to turn 80p into a £1, taking out 25p and using the remaining 75p to generate retirement income still makes the same sense it always has except from next April you can also get back the 75p!