Pensions
Pension contributions (Table B)
There are no changes in the annual and lifetime allowances between 2014/15 and 2015/16. However, yet another cut in the lifetime allowance has been announced for 6 April 2016 – the limit on tax-advantaged pension funds will be set at £1m (from £1.25m) for pension benefit events (first drawing benefits, whether a tax-free lump sum or an income) from 6 April 2016. Once the lifetime allowance has been used up, higher tax rates apply to withdrawals from pension schemes.
From 2018, the lifetime allowance will rise each year in line with inflation.
Flexible pension benefits
The Chancellor announced in March 2014 that people with defined contribution pension funds will be able to have flexible access to their savings from 6 April 2015. The details of the new rules have been developed in the last year, but the essential points remain the same: in most cases, it will be possible to draw 25% of the fund tax-free, and the remaining 75% can be drawn out subject to the saver’s marginal rate of income tax in the year in which the money is drawn. This is a very significant change, and anyone with pension savings should take advice to understand their options and the tax consequences of different courses of action. Drawing out all the money at once will not only potentially leave nothing for the future – it may create a large current tax bill.
Existing annuities
Those who were required in the past to buy an annuity with their pension fund have complained that they have missed out on the new flexibility. The Chancellor has announced that, from 6 April 2016, they will be able to sell their annuity for a capital sum without incurring a penal tax charge. The Government will consult over the next year to try to reduce the risk of people making ill-advised and unwise decisions.
In addition, joint lives or guaranteed annuities benefit from 6 April 2015 from a measure announced last year. If the original annuitant dies under the age of 75, the income can be left tax-free to a designated beneficiary. If the annuitant dies over the age of 75, the income will be taxed at the recipient’s marginal rate.
| Tax Trap |
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| The pension changes create opportunity and risk – be cautious and take advice |