From April 2015, the UK will see significant changes to pension planning by the introduction of Flexible Pensions, as announced in the 2014 Budget. In addition, the abolishment of the 55% “Death tax” has left room for Inheritance tax planning and the recent 2014 Autumn Statement bought forth changes to both annuity pensions and state pensions. How will this affect pensions for doctors and dentists?
Flexible pensions – how does it work?
In a couple of months pension savers with a Defined Contribution Scheme like a Self Invested Personal Pension (SIPP) will have the option to draw their pension fund in full once they reach the age of 55. This is to offer flexibility and encourage further investment in pension plans.
An important point to note before you make the phone call to extract the funds and head to to the car dealership or the travel agents, there are tax implications. 25% of the fund can be drawn tax free, after which regular income tax rates apply at 20%, 40% and 45%.
You can’t have your cake and eat it!
As tax relief is available on pension contributions it had been necessary for the government to build strict rules around Flexible Pensions to avoid abuse.
To use an example, a 55+ year old pension saver could not pay money into a pension fund claiming tax relief and then immediately make a withdrawal of 25% tax free. This would be a case of “having your cake and eating it”.
Further more, pension funds considered to be “in drawdown” only qualify for tax relief on a maximum contribution of £10,000 per year.
The 2014 Budget changes are viewed as an end to archaic legislation dictating how pension income is drawn.
These changes are aimed to instil confidence again in pension planning as a robust, tax efficient retirement vehicle and pave the path for more innovative pension products in the future.
Dentists and Doctors Pensions and Inheritance Tax planning
At the start of Autumn George Osborne announced significant changes to the so-called “Death Tax”, currently set at 55%.
From April 2015, this tax will be completely scrapped for those aged 75 or less, meaning if a pension holder dies before aged 75 the pension fund can be left to the chosen beneficiary completely tax free. The funds can be withdrawn from the pension fund by the beneficiary, also tax-free with little restrictions to when, where and how they make the withdrawals.
For those aged 75 and above, the deal isn’t quite so favorable, however it has to be said up front it is still a marked difference on the current position. For pension holders over aged 75, the transfer to the chosen beneficiary remains free of tax implications, although tax is payable by the beneficiary on withdrawals at the respective income tax rate, 20%, 40% or 45%. There is the option to take a lump sum but this is subject immediately to 45% tax. Other than that though terms are fairly flexible again with little restrictions.
Finally on this note, an addition announced in the recent Autumn Statement, those with a joint life or guaranteed annuity pension will also be able to receive pension payments tax free should one of the pension holders die before aged 75. The annuities of these policies can also from April 2015 be passed to any beneficiary, not just a spouse.
Greater need for a personal pension plan
The recent Autumn Statement announced a 2.5% rise in the state pension for 2015. It could be worse but this suggests that the minimum single tier state pension would be just over £150 a week. Could you live (happily) on that?
This further highlights the need to plan ahead for your retirement.
Pensions are a tax efficient way to save for retirement. Tax relief can be claimed on pension contributions up until age 75 and whilst there was talk about changing this bracket, the Chancellor announced in the Autumn Statement that this limit is to be continued
With the new rules coming into effect from April 2015, it means that investing into a pension plan can be done so with more confidence knowing that there is an element of flexibility with how and when withdrawals can be made as well as the reassurance that your pension fund can be transferred upon death to your loved one.
It’s big changes for the pension world!
Dental & Medical Financial Services would be happy to discuss your own retirement aspirations and ensure you are set up with the best plan.
Contact Darren today to discuss your own personal financial plan for 2015
Tel: 01403 780 770