The Chancellor’s 2014 Budget may be the biggest game-changer since Lloyd George’s introduction of the state pension in the 1908 Pensions Act.
Lloyd George’s Act was seen as dangerously radical at the time. That’s not the case this time round.
It has, though, levelled the playing field as far as alternatives to the old pensions system is concerned.
In summary
- You are no longer obliged to buy an annuity when your pension plan matures.
- Under the old regime, many invested in flexible ISAs instead of the rigid pension schemes (ISAs allow savings to grow tax-free and can be cashed in any time).
- N(ew)ISAs are further improved. You can invest £15,000pa (up from £11,520pm), and it’s easier to move between cash and stocks & shares.
- Now we all have the freedom to take our money on retirement to spend or re-invest as we wish.
Keeping up-to-date
- On 1 July 2014, ISAs automatically became NISAs.
- You can add further savings up to the new £15,000 limit.
- The whole £15,000 allowance may be held in cash, stocks & shares or any combination of the two.
Investment growth cycle
Pensions:
- Both pensions and ISAs offer is a wide range of cash and investment options. While you are paying into your pension it benefits from tax relief coupled with compound interest.
- This can significantly increase the size of your total pot at retirement.
- Even more so if you are a higher rate taxpayer paying 40% tax on your ordinary income which is matched by 40% tax relief on your pension payments.
NISAs:
- Savers do not benefit from tax relief on payments at source, as with pensions.
- However you can transfer between stocks & shares and cash.
- Previously, you could only move money from a cash ISA to a stocks & shares ISA but not the other way around.
- The transfer of cash/stocks/shares between providers will be unrestricted.
Taking your money
- From April 2015, you can access your pension pot in its entirety at any time after the age of 55.
- The first 25% will remain tax-free, the remainder being taxed at marginal rates.
- The minimum age for access is being raised to 57 in 2028 to keep pace with rises in the state pension age.
- You can take money from your NISA at any time, tax free.
A worked example
- From a £100,000 pension pot you can take £25,000 tax-free with the remaining £75,000 available to spend / re-invest as you wish.
- The £75,000, if withdrawn, is treated as income for that tax year, pushing you into a higher-rate tax band.
- You could draw the money in smaller annual lump sums which would attract basic rate tax.
- You could keep your money invested and use an ‘income drawdown’ facility.
- This could be an attractive option if you were a higher rate and are now a basic rate taxpayer.
- You could have got 40% tax relief on money paid into your plan and be paying 20% on exit.
- If you are after the security of a guaranteed income for life, of course you can still buy an annuity.
- These are predicted to improve as providers are forced to offer better terms in the face of dwindling customers.
Other sources of income should also be taken into account. As well as NISAs you may be able to generate income from your home or from an investment property. Many also work part-time or on a consultancy basis in the early years of retirement.
Our view
Choices are a great thing to have but it comes at the cost of complexity and weighing up the different options available to you.
That means having the knowledge, time and resources to keep on top of matters.
Matching your income and capital requirements to your capital and income sources is a skill. Most want to pay as little tax as possible whilst generating decent returns and protecting their capital.
We offer a comprehensive retirement planning service based on our 20 years’ experience.
It will save you money, tax, time and worry over the years.
Drop us a line: advice@www.townclosefp.co.uk or give us a call 020 7993 4898