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Change to pension legislation a big opportunity

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Thursday June 5, 2014 at 10:00am
“You have earned it, you have saved it, this government is on your side”, so said George Osborne in his March 2014 Budget. And this time he wasn’t just talking to a small minority of people as 13 million members of defined contribution pension schemes will be affected. That is anyone with a non final salary pension.

He was referring to the proposed change in 2015 to allow individuals to withdraw as much as they like, without limit from their pension. You will still need to be over 55 to do this and you will still be able to take 25% of your fund tax free. The rest will be taxed at whatever your tax rate is at the time you withdraw the funds.

There are concerns about people not being sensible and withdrawing all of their funds and becoming reliant on the state. However, George Osborne thinks not. If you consider the average pension fund in the UK is worth £36,800 then under the new system that person would receive £8,750 tax free cash and £26,250 as a one off taxable payment.

Under the old system the tax free cash would be the same £8,750 but the £26,250 would purchase an annuity. A 65 year old male basic rate tax payer buying an annuity with 50% spouse annuity would receive £24.23 per week after tax. This would buy about 7 pints of beer so you can see that the lump sum would probably be more attractive.

We have been saying for years how good pensions are as a vehicle for saving, there is tax relief on the contributions paid in, tax free growth and tax free income from investments. The problem has always been the fact that 75% of the fund is locked up after retirement. The other problem is if an annuity is purchased the bulk of the fund can be lost before the pension is fully paid.

Now under the new rules the member can have full access to their funds in their lifetime and also on death. We think the change is definitely one for the better and is something anyone approaching retirement, or the 55 age limit should start thinking about now. We’ll be explaining our views on these changes and why pensions are probably the best investment you’ll ever make at our next seminar on 18th June 2014.

This is a topic I will be revisiting in future blog posts and covering in our monthly newsletter.

Andy Parker
Chartered Accountant and Chartered Financial Planner

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Parker Chartered Accountants and Financial Advisors is the trading name for PLW Advisors Ltd (Registered No. 10396831), and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here