SIPPs - New Pension Rules FAQ
The new pension reforms introduced in the 2014 Budget will give SIPP holders a great deal more flexibility on how they can take their pension benefits.
Who do the changes affect?
These changes primarily affect anyone with a personal or workplace defined contribution pension. Savers in defined benefit schemes will also be able to transfer into defined contribution schemes, although this may not, necessarily, be advisable. If in any doubt you should seek advice from a financial adviser.
The biggest change is that from April 2015 you will no longer have to buy an annuity with your pension pot. In fact, all restrictions on your pension pot will be removed and you will have total freedom over how you withdraw your money
Under the new rules you will be able to access your entire pension after the age of 55. As is the case now, 25% of your money can be withdrawn free of any income tax. The remaining 75% of your money will be subject to income tax at your highest marginal rate. You can withdraw it all at once or in stages.
Once you have withdrawn your money, you can spend or invest it in any way you see fit.
When do the new rules come into place?
The new rules come into place in April 2015. However, there are temporary measures in place before then. If you are able to wait until April 2015 to access your pension, you might want to do this – but if not, you can consider the advantages of the temporary measures.
What happens before then?
There will be temporary measures up until the new rules come into place in April 2015.
Previously, if your pension savings amounted to less than £18,000 you were able to withdraw the entire amount in cash. From 27 March 2014 this amount has been raised to £30,000. This is known as 'trivial commutation' and when you make the withdrawal, it will be taxed at your highest marginal rate.
If you have larger amounts in pensions savings, you can still take up to three pensions’ worth, ( up to £10,000 each) as cash, rather than two £2,000 pensions, as before.
What about drawdowns?
If you use 'income drawdown' in your pension, you can take out larger sums as income - 150% of the equivalent annuity, rather than 120% previously.
Some providers have indicated that they will only be able to apply the new rules on the drawdown anniversary date, however some providers will allow you to take advantage of the new rules immediately.
To qualify for the more 'flexible drawdown', you will need just £12,000 of secured pension income from other sources to make unlimited withdrawals. This was previously set at £20,000.
Can I withdraw money more slowly to limit tax?
You could take the money out in annual lump sums (you may choose income drawdown for this option). Remember, from April 2015 savers can withdraw as much as they want, so income can be varied to stay within the basic tax rate or nil-rate threshold.
What if I still want to buy an annuity?
If you still wish to buy an annuity to give you a guaranteed income for life, you can still do this.
If you have an existing annuity that has been in place for a while, you can’t retrospectively change your mind, and unfortunately you will have to continue with it.
However, if you bought your annuity recently and wish to change your decision, you can check with your provider to see if you have time to change your mind. Many providers are extending their 'cooling off' periods in the wake of the budget changes.
Open an account
Opening an account is easy and you will need:
- Your address details for the last three years
- Your debit card details including bank account number and sort code
- Your National Insurance (NI) number
Please be aware of the risks involved. The value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. Past performance is no guarantee of future performance. Tax treatment depends on your individual circumstances and may be subject to change. If in any doubt, please seek advice.
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