Tony Harris from ContractorFinancials specialises in financial services and pensions for contractors and is on Shout99's panel of experts for this field. Tony writes:
In comparison with recent years, when the austerity Chancellor has presented very little worth cheering, this year’s Budget had plenty of good news on the subject of pensions and investments that will be of real benefit to contractor community. This was a budget day aimed squarely at mass affluent savers and also those older, disenchanted voters who may have felt drawn to UKIP in recent years.
Bingo! Pensions got just exciting
In contrast to initial fears that the 25 per cent tax free lump sum that savers can currently withdraw from a pension as early as age 55 would be limited, George Osborne instead announced major improvements to how and when pension benefits can be accessed.
In addition to the relatively obscure reduction in tax rates on bingo, of more interest to most contractors was the Chancellor's announcement of some of the most far reaching changes in pension history. Osborne has embraced the notion that savers can be trusted to make sensible choices in their retirement and do not need to be shackled with countless penalties and restrictions regarding how they access their post retirement funds.
A brave new world for savers
For those contractors who have old legacy ‘defined contribution’ money purchase pensions from previous employers, from 2015 the straightjacket is well and truly off in terms of how you access your money. Gone is the requirement to transfer to a personal pension or otherwise risk having to buy a rigid annuity based income.
Instead, having taken up to 25 per cent of your fund as tax free cash under current rules, you will then continue to have the existing options of buying an annuity, can transfer to a personal pension ‘drawdown’ arrangement, or encash your pension subject to a tax charge.
If you choose the latter option you will avoid a punitive 55 per cent tax charge that used to be levied on personal pensions encashment and instead have these funds simply added to your earnings and subject to income tax instead.
Interim measures for Personal Pensions and SIPPs
The Chancellor also implied that these new encashment rules will be applied to personal pensions too.
In the meantime a raft of measures will come into force to release many of the constraints that currently apply to personal pensions.
‘Flexible drawdown’ currently allows clients with £20,000 per annum guaranteed income from final salary and state pensions, to draw out their full fund, subject to income tax at the marginal tax rates. This guaranteed limit now falls from £20k to £12kpa.
In addition, so called ‘triviality rules’ have been relaxed, irrespective of the presence of guaranteed income.
Current rules allow the encashment at age 60 and above, subject to 25 per cent tax free cash and then income tax, of two pensions up to £2k in a lifetime and these are now being moved up to three pots of up to £10k.
Ignoring the small pension pot rules, additionally an overall fund value triviality limit is now in place at £18k and this is being increased to £30k meaning a contractor with total funds of £29,999 will be able access this entire fund, 25 per cent tax free and the balance subject simply to income tax.
Finally, those clients who prefer not to buy a rigid annuity with their personal pension and instead transfer to a standard, ‘capped drawdown’ arrangement, currently have their maximum income restricted to 120 per cent of Government ‘GAD' income limits. These limits are being changed to £150 per cent of GAD meaning contractors will be able to draw more from their fund even though gilt yields remain stubbornly low.
In other pension news
As previously reported, the lifetime allowance is due to drop from £1.5million to £1.2m on April 5, 2014 and the annual allowance will fall from £50,000 to £40,000 on the same date. If you have a lump sum to invest then make sure that you have done so in plenty of time to avoid paying tax on any overpayment. Thankfully, no further changes to the annual or lifetime allowance were announced in the Budget.
At ContractorFinancials, we are very excited about the potential of these rule changes. Whilst we have been beating the drum for well over a decade now regarding the unbeatable tax breaks associated with pension investment, the rigid nature of how you access the funds in retirement has undeniably been a turn off for some freelancers.
Now contractors will be able to exploit the upfront tax benefits, grow a fund tax efficiently, but then have access to the bulk of the fund at or during retirement. Pension investment will also become a key plank of any estate planning work that clients undertake to gift pensions through the ages and it is great to have some good news to report after several years of reduced allowances and income restrictions.
For further information about pensions and how contractors can benefit from these rules, contact Tony via our online Pension finder service
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Susie Hughes © Shout99 2014