Changes to taking benefits from pension plans (not including final salary schemes)
From next April (2015) the Government is proposing that there will be no restrictions on people’s ability to draw down from their defined contribution pension plans, after age 55. The tax rules will be drastically simplified to give people unfettered, flexible access to their pension savings. Apart from the tax free cash element of the pension fund (usually 25%) any funds withdrawn will be taxed as income at the individual’s marginal rate(s) of income tax.
When the new system is in place, the Government will not prescribe a particular product which people are required to purchase or invest in when accessing their savings. It will be up to individuals to decide how they want to access them, either as a lump sum or through some sort of financial product:
- those who want greater control over their finances in the short term will be able to extract all their pension savings in one go, and invest/spend them as they see fit. This flexibility will be particularly beneficial for those with a relatively small amount of overall defined contribution pension savings for whom buying an Annuity or purchasing a Drawdown product would not be in their interests;
- those who continue to want the security of an Annuity will be able to purchase one, either at the point of retirement, or at a later stage. This may be with either some or all of their defined contribution pension pot;
- those who would prefer to keep their savings invested and access them over time will be able to purchase a Drawdown product. However, unlike the current system, there will be no limits on the amount someone can withdraw from their Drawdown arrangement each year, and there will be no minimum income requirement which people have to satisfy in order to withdraw from their pension.
The introduction of more choice for pension savers with some form of defined contribution savings presents an opportunity for Providers of retirement income products to innovate and create products and processes which better meet the evolving needs of consumers.