Recent improvements mean that pensions are now unquestionably the best way to save for your retirement.
Recent months have seen the "most radical changes to pensions in almost a century," according to Hargreaves Lansdown.
As a result of these changes, it could be argued that modern pensions are becoming the perfect vehicle for long-term investing. Let's take a look at what's changing, and why they make pensions even more compelling.
Lower taxes on cash withdrawals
From April 2015, British investors aged 55 plus will have unparalleled access to their pension pots. With this new-found freedom, retirees can choose exactly how to pull income from their pensions.
At present, those with defined contribution plans (not final salary schemes) can withdraw up to 25% of their pots as tax-free lump sums. From the 2015/16 tax year, additional withdrawals can also be made, subject to income tax at the owner's highest marginal rate (at 20%, 40% or 45%).
You could withdraw your entire fund as a lump sum, if you want to.
Removal of 55% 'death tax' on inherited pots
As lovemoney.com has previously covered, the Government plans to scrap the pensions 'death tax'.
At present, you can pass on a pension as a tax-free lump sum to beneficiaries if you die before age 75 without having taken any tax-free cash or income from your fund. Any other 'pension inheritances' are hammered by a 55% tax charge.
From April 2015, you will be able to pass on your pension, free of tax, to anyone you nominate, provided they keep the money in a pension. If you died after age 75, any withdrawals made by these beneficiaries will be taxed as income at their highest marginal rate. Income taken from inherited pension funds will be tax-free if the member died before reaching age 75.
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Income drawdown limits scrapped
Income drawdown is where pension investors choose to leave their fund invested at retirement and draw an income directly from this pot. At present, there are strict limits on how much most people can draw each year. From April 2015, these drawdown limits will be scrapped, leaving the over-55s free to decide how much pension income to draw down and when.
Investors already in income drawdown will be able to move to the new unlimited regime, but with restrictions on how much they can put into pensions in future.
New contribution limits
At present, you can put up to 100% of your earned income into a pension, subject to a £40,000 annual allowance and scheme-specific contribution rules. This ceiling is more than generous for all but the best-paid workers.
However, from April 2015, if you make any withdrawals from your pension pots on top of the 25% tax-free cash, then your contributions to defined contribution pensions could be throttled back to just £10,000. This is to stop workers from 'recycling' withdrawals back into their pensions in order to grab another round of tax relief.
This new restriction on contributions will not apply if your pension is worth up to £10,000 and you take it as a ‘small pot’. You can do this up to three times from personal pensions.
At present, investors already in flexible drawdown cannot contribute to defined contribution pensions. However, from April 2015, they will be able to take advantage of this £10,000 ceiling on contributions.
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Free, impartial guidance
The Chancellor wants everyone to have access to free, impartial pension guidance at retirement. This service will be provided by consumer-facing organisations such as The Pensions Advisory Service (TPAS) and the Money Advice Service (MAS).
From April 2015, this no-charge service will be available via the internet, phone and face-to-face. There remain significant questions about just how useful this guidance will be, however.
Transferring a defined benefit pension
From April 2015, anyone with a defined benefit (or final salary) pension will be able to take advantage of these new rules and make unlimited withdrawals. To do so, they would have to transfer from a company scheme into a personal pension. This may entail losing very valuable guaranteed benefits, so should only be undertaken after taking expert, unbiased advice.
Note that it will no longer be possible to transfer from most public sector pension schemes into personal pension plans.
Retirement ages to rise
Now for the bad news: the age at which you can draw your personal and occupational pensions is set to rise from the current 55. It will leap to 57 in 2028, before increasing with the rise in the State Pension age. However, this age limit will always remain 10 years below the State Pension age (which is set to rise to 68 by 2046).
This age increase will not apply to public-sector pension schemes for firefighters, police and armed forces personnel.
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