So what do I know? It started off quiet enough – increases to tax allowances, a few changes to ISAs and then, the bombshell. From April 2015, everyone in a DC scheme (and that includes personal pensions and SIPPs) will be able to access their entire pension from age 55.
The pension commencement lump sum will remain tax-free and at 25% of the fund, with the rest available without limit and taxed at the recipient’s marginal rate. This change will be fully retrospective, so anyone in drawdown can benefit from the change.
Now I have long been an advocate of removing the drawdown link to GAD rates, but had assumed we would have a new set of limits – perhaps fixed percentages at set ages or some other basis. I had not assumed we would go so far so quickly!
As part of the same package it appears that the 55% tax rate on lump sum death benefits has been seen as too high (again, I’m in agreement with this). There will be a consultation process that will look at this, but I’d expect to see the tax rate to be around the pre A-Day level of 35%.
These changes will apply to DC schemes, not necessarily DB schemes, and the problem seems to be the fear that the new regime could encourage a rush of transfers from such schemes.
Perhaps the future will be DB to accumulate and DC to decumulate! Indeed, if you were a member of a DB scheme who has been told to stop funding due to the lifetime allowance, why would you not want to transfer to gain the new flexibility?
I’m not wanting to open the floodgate – some further work will be done on what can and cannot be done and any restrictions or limits that will apply!
As part of the whole package, but less permissive, there will be a consultation process on increasing this minimum age for access to your pension fund from 55 to 57 – keeping the period between the first date you can access your pension and the state pension age at ten years.
So what does it all mean?
Without the need to buy an annuity, the big question will be how people use their pension funds. Will they draw it all out as income at retirement, or just as income to spend as they need it, keeping money invested tax-free until that point?
Even though we are only just a couple of days after the announcement there are lots of ideas and strategies being suggested.
In the past the big objection to such a laissez-faire approach had been the ongoing sustainability of funds. We had the development of flexible drawdown with a stipulated Minimum Income Requirement that was unobtainable for most – this won’t be an issue for long!
The new single tier state pension will lift most above the means testing limit and so spending your pension fund will mean surviving just on the state pension.
Is it the death of the annuity market? Difficult to predict but for the first time annuity products will need to stand on their own two feet as investment products for a particular purpose – a guarantee of an income as long as you live.
There will be new investment opportunities for retirement strategy funds but there could be others – already there is talk of a boost to the buy-to-let market!
It was unexpected and more radical than we ever thought and once we get the benefits of time we will be able to consider what it all really means. Undoubtedly there will be spin-off ideas and opportunities which I can no doubt return to in future articles.
The final part of the jigsaw is the promise of an offer of face-to-face guidance for all retirees and this will also be subject to speculation and consultation.
A brave new world or will we see a re-run of the pensions simplification U-turn on esoteric assets? Only time will tell!
Mike Morrison
Head of Platform Technical
AJ Bell