1. 2014 was a seismic year in the world of financial planning, the impact of which is likely to
be felt for many years to come. George Osborne’s budget statements regarding pensions
have once again made them not only interesting, but very likely the cornerstone of
everyone’s saving strategy.
The following thoughts are structured to give
the information I believe is likely to be of most
interest (based on the questions I am most
often asked), some thoughts about how this
could impact upon you, and finally some areas
where you might be able to enhance your
planning for the future.
Pension scheme members will be
free to access their pensions as they
see fit
Once you reach age 55, you will have complete
freedom over how you choose to use your
pension fund. In many ways, pensions will be as
accessible as a bank account. The main options
we expect most to utilise to draw their pension
will be to:
n Take up to 25% as a tax free lump sum
and use the residual fund to provide an income
(either as an annuity or Flexible Access Pension,
which is effectively replacing the drawdown
concept you might have heard of). If you were
to choose the Flexible Access Pension, there are
no limits to the income you can draw apart from
how much is in the fund, but any income would
be taxable.
n Take a series of lump sums, with 25% of
each withdrawal being tax-free and the
remainder taxed as income (known as
Uncrystallised Funds Pension Lump Sum).
n As an extension of the above, take the
whole pension as a lump sum, with 25% of the
withdrawal being tax-free and the remainder
taxed as income.
NB: Members already in a drawdown
environment will also be free to benefit from
the reforms.
…However everyone should consider
the taxation implications
This is one of the reasons why we don’t expect
everyone (especially the well advised) to be
emptying their pension funds.
If you draw funds in excess of the tax-free
lump sum, paid as either income or a lump
sum, this will be added to your other income,
and subject to income tax at your highest
marginal rates. Depending on the income
drawn, this could mean that up to 45% income
tax could be payable on withdrawals, and don’t
forget that the effective marginal tax rate
between £100,000 and £120,000 is 60% as your
personal allowance is reduced.
George Osborne has forecast that the pension
flexibilities will bring in an additional £4bn in
tax by 2020 (in 5 years’ time), and £8bn by
2030 (Source HMRC). This is because some
people will take action to access the pension
flexibilities unaware of the consequences, and
unaware of the ways to plan effectively to
make sure this doesn’t happen.
Death benefits from pensions are
much more beneficial
There was a welcome surprise in George
Osborne’s 2014 Autumn Statement in terms of
the above, and this is another reason why we
don’t expect everyone to empty their pension
funds.
Whilst a review of death benefits was
announced in the March 2014 Budget, nobody
was expecting the outcome to be as generous
as it has been. Notwithstanding any charges
that might apply if a deceased’s total pension
holdings breach the lifetime allowance
(currently £1.25million), the following applies:
n If a scheme member dies before age 75,
the whole of the remaining fund can be paid to
beneficiaries tax-free, as a lump sum or
income. Currently this is only the case if
benefits had not been drawn from the pension
(the pension is classed as “uncrystallised”), with
a tax of 55% currently applying to lump sum
death benefits from schemes where pension
benefits have been crystallised (or if the
member dies over age 75).
n Where death occurs after age 75, lump
sums paid before April 2016 will be taxed at a
flat rate of 45%. Income and lump sums paid
after April 2016, can be paid to beneficiaries
subject to income tax at their marginal rate.
n Anybody can be nominated to be a
beneficiary and receive pension death benefits.
Currently, only dependents, usually a surviving
spouse, are the primary beneficiary in most
instances.
For many savers, this change should be as
exciting as the income flexibilities from March.
This opens a wide range of opportunity for
planning for future generations, with pensions
now being not only a tax efficient and flexible
savings vehicle, but also an intergenerational
wealth management vehicle. This, coupled with
the fact that generally speaking pensions will
not form part of the
inheritance tax
calculation, means
that for many,
pensions could
become the first
thing saved into
while accumulating
wealth, and one of
the last things that is accessed when drawing
on wealth in the future.
www.pricebailey.co.uk
Pensions – 2015 sees the realisation of
George Osborne’s ground-breaking changes
Article by Duncan Wilson,
Private Client Manager at Price Bailey

2. Depending on how you draw income,
future pension contributions could
be limited to £10,000 per year
Where flexible benefits are taken from April
2015, future pension contributions will be
limited to £10,000 per year. This does not apply
to:
n Those previously in capped income
drawdown who remain within the cap that
existed pre April 2015
n Those only taking tax free cash
n Those purchasing an annuity
n Those accessing pensions under the
triviality or ‘small pots’ rules
With this in mind, care should be taken on how
you draw benefits if there is a possibility you
might wish to pay in larger contributions in the
future.
Annuities are not dead
Perhaps a little controversial to say, as the press
comment and public opinion is currently
against annuities. However, it is widely
expected that this market will evolve over time.
Indeed, many commentators are now
predicting that annuities could be used by
certain people as a type of insurance policy to
provide their base line living expenses, and
then flexibilities accessed when additional
funds are required. This would mean that
people’s standard of living would not be
compromised in the future in the event that
their pension funds are depleted (such as
happened to a minority of people in the USA
who run out of money).
The annuity market is likely to evolve greatly
over the coming years, and it is important that
these are considered (in whatever form they
take) as a part of a retirement strategy, even if
it is only to discount them.
Not all pensions will benefit from
the Flexibility
The new freedoms apply to money purchase
schemes only. Members of final salary schemes
will receive their tax-free cash and income as
outlined in the scheme rules. Whilst some could
elect to transfer to a money purchase pension,
this is a difficult decision to make, and it is
important that the implications of such a
decision are understood. Such a decision only
applies to private sector and local government
final salary schemes, and only once professional
advice has been received. Teachers, civil
servants, police, NHS staff, the armed forces
and fire fighters will not be allowed to transfer.
You also need to consider whether your
existing pension scheme is able to
accommodate the flexibilities. Providers are
under no obligation to change their rules to
allow the new freedoms, and it is important
that you review your pensions to assess their
continued suitability to accommodate your
wishes.
In conclusion
The pension flexibilities offer a fantastic
opportunity for all pension savers to plan not
only for their future, but also for the future of
generations to come. We expect your pensions
to sit alongside a wide range of investment
vehicles to provide for your retirement income,
and it will be making all of these arrangements
work together that will ensure you receive your
future benefits in the most efficient way and
ensure that your wealth is passed onto your
beneficiaries with the minimal impact.
If you would like to discuss any of the above
points, your pensions or any part of your
wealth structuring, please contact us.
www.pricebailey.co.uk
Pension update continued
Duncan Wilson,
Private Client Manager
www.pricebailey.co.uk/DuncanWilson
T: +44 (0) 20 7382 7427
M: +44(0) 7818 562305
E: duncan.wilson@pricebailey.co.uk
For more information please visit us at
www.pricebailey.co.uk
Price Bailey Private Client LLP is an appointed representative of PB Financial Planning Ltd which is authorised and regulated by the Financial Conduct Authority. This article is intended for general information purposes only and should not
be taken as advice in any way.