Budget puts pensions in pole position
PENSIONS have moved firmly into pole position in the savings stakes following a surprise re-writing of the tax rules by the Chancellor – writes David Sparrow, director of David Williams IFA.
A raft of concessions unveiled in the 2014 Budget mean that pension savers will have far more flexibility about how they enjoy the fruits of their saving.
From next April it will no longer be compulsory to use the bulk of a private pension fund to pay a regular income. This has typically been achieved through the purchase of an annuity.
Instead, savers will have the option to draw some, or all, of the fund as a lump sum— or to dip into their pension pot as and when they choose from age 55.
While there is no requirement to buy an annuity, some savers may still want to use some of their savings to secure this guaranteed income. But they will be doing so on their terms, not because tax rules say they must.
Other measures already in force help those with small pension pots take the entire fund in one go and raise the maximum income for those in pension drawdown.
The pension changes put the spotlight firmly on the importance of advice. With more choices at retirement, it will be essential to discuss all these options with an experienced and highly qualified financial planner.
For business owners, where pension contributions can be made by the company from gross pay, it becomes extremely compelling to fund pensions and enjoy tax relief. One quarter of the pension is available tax free, with the rest taxed at the saver’s marginal tax rate.
We can envisage scenarios where a director or senior executive’s pension receives big contributions in the run up to retirement or a business sale, with funds then drawn back out shortly afterwards.
Take the case of a director who pays tax at 40%; for each £1000 of payroll cost to the business only £510 flows through into their hands after income tax and NI costs. Channelling this £1000 via a pension and drawing it as a lump sum would see the director get more than £680 net of all tax and costs. This is also a lower overall tax rate than drawing dividends.
There are limits to this new flexibility. It only applies to those with defined contribution pensions, where savings from employer and employee are invested for growth. Those with defined benefit pensions, linked to your salary and length of service, will still receive the bulk of their pension as an annual income.
To discuss the wide range of new savings opportunities around your pension and other Budget developments, contact David Williams IFA today on 01604 621302.