The 2015 UK budget has unveiled several major changes in the UK pension system. At the same time the budget has also instigated several consultations on even bigger changes.
What’s changed in the Budget?
There were three main changes in the UK budget. The first was to increase the size at which a small pension fund can be liquidated. This was increased from £20,000 to £30,000. In addition to this the government has reduced the amount of guaranteed income someone is required to have to avoid having to use their pension fund to purchase an annuity from £20,000 per annum to £12,000 per annum.
Both of these changes are relatively minor and make sense by allowing people with smaller pension funds to avoid the annuity market which has historically offered people bad values for their retirement savings.
The biggest change in the budget was to increase the amount of money a person can withdraw from their pension pot each year. This now means that an individual can pull down 150% of GAD each year. GAD is a number based on life expectancy and government bond interest rates that set’s out how much someone can expect to draw down from their pension sustainably each year. To give you an idea drawing down at 150% of GAD would allow a 65 year old to take out 9% of the value of their pension in the first year. This change has also been matched in many QROPS schemes as well that follow the same rules as the UK system.
In addition to these changes the government will also prevent public sector workers from withdrawing their final salary pensions.
What’s going to Change?
Consultations were announced in the budget that will consult the industry on some even larger changes to come out in the next year. Perhaps the biggest change is giving people the ability to withdraw the entire value of their pension at age 55. However these withdrawals will not be tax free as some in the media reported but instead liable to up to 45% income tax.
As part of this change the government is also investigating stopping private sector workers with final salary schemes from transferring out. The reason for this is that these types of pensions are heavily invested in government bonds and if people suddenly start taking the pensions out then the government bond market could collapse. This move would also prohibit people from transferring into offshore tax efficient QROPS’s schemes.
What’s coming around the corner?
There are many rumours circulating about further changes the government may make in the next year or two to the pension system to generate more tax for the government.
The Labour Party and potentially the Tory Party as well are said to be interested in capping the maximum 25% tax free withdrawal at £36,000. This would generate a substantial amount of tax for the government especially if people start to pull down the entire value of their pension funds.
In addition the treasury is said to be quite interested in capping the amount of pension savings anyone can have at £1 million or around £33,000 per year. Anyone with a fund larger than this would be liable to a 55% tax charge on the balance above £1 million.
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