The government has published the Taxation of Pensions Bill, which will change the tax rules to allow individuals aged 55 and above to access their defined contribution pension as they wish from April next year. As part of this bill, the government is proposing to change the rules on taking pensions as a lump sum to allow people to take a series of lump sums instead of just one.
Currently, people who want to take their pension as a lump sum would take 25% of their pot tax free and then place the other 75% in a draw-down account. Any money they take out of their draw-down account will be taxed at their marginal rate. Under the new tax rules, individuals will have the flexibility of taking a series of lump sums from their pension fund, with 25% of each payment tax free and 75% taxed at their marginal rate, without having to enter into a draw-down policy.
Chancellor of the Exchequer, George Osborne, said:
”People who have worked hard and saved all their lives should be free to choose what they do with their money, and that freedom is central to our long term economic plan. From next year they’ll be able to access as much or as little of their defined contribution pension as they want and pass on their hard-earned pensions to their families tax free.
For some people, an annuity will be the right choice whereas others might want to take their whole tax free lump sum and convert the rest to draw-down. We’ve extended the choices even further by offering people the option of taking a number of smaller lump sums, instead of one single big lump sum”.
In the 2014 Budget, the government announced a fundamental change to how people can access their pension. From April 2015, around 320,000 individuals retiring each year with defined contribution pension savings will be able to access them as they wish, subject to their marginal rate of tax.
In September, the Chancellor announced that from April 2015 individuals will have the freedom to pass on their unused defined contribution pension to any nominated beneficiary when they die, rather than paying the 55% tax charge which currently applies to pensions passed on at death.
Carol Knight, Operations Director at the Tax Incentivised Savings Association (TISA), said:
“Today’s announcement is more good news for savers who are to be offered much greater flexibility in how they use their pension to meet their personal financial needs in retirement. The government’s programme to restructure pensions is a huge step in the right direction, however there is still much to do in the UK to encourage people to save from an early age. We need to educate people about the benefits of saving for their financial well-being throughout their working lives and how this can build a pension pot to take full advantage of these reforms”.
This article was originally published on 03/11/2014. Taxation reliefs, levels and bases can change in the future and the content of the article refers to our understanding of taxation legislation at the date shown. Tax is dependent on your own personal situation and circumstances and is subject to change based on UK legislation and taxation regime.
www.gov.uk (2014 10 14 – news story)