Pension Rule Changes
Wednesday 9 September 2009
From 6 April next year, the minimum age for drawing a private pension will rise from 50 to 55. This change will come as a shock to some.
This is good news and bad news. Why?
Deadlines create ‘selling’ opportunities to some financial advisers that receive commission.
In truth clients need fee-only advice to review their financial situation. By divorcing the product sale from the advice, a client can be assured they are getting the right solution. Whilst it may appear attractive to take the tax free lump sum early, it should be very carefully considered.
We have detailed below some dates that might be applicable to you.
Take someone born on 7 April 1960. Before these changes to the minimum retirement age, they could have started drawing their pension from their 50th birthday on 7 April 2010. Now, they will have to wait until 7 April 2015 – their 55th birthday – before they can touch their pension. Everyone between age 50 and 55 after 6 April 2010 is affected in the same way, and there is nothing they can do about it.
Anyone age 50 before 6 April next year? If so, they still have a chance to make plans for their pension before the changes take effect.
For example, someone born on 18 May 1958 could have started drawing their pension now. However, if they have not taken their pension by 6 April 2010, they will have to wait until 18 May 2013 – their 55th birthday.
In truth, few people can afford to retire on their 50th birthday (or their 55th birthday for that matter), but that doesn’t mean that they shouldn’t take all or part of their pension early. With a personal pension, there is of course no need to retire when the policyholder takes the benefits but for members of employer pension schemes, it’s worth checking with them first to make sure this will not cause any problems. For instance, some employers stop payments into the fund if the pension is taken early.
Take the tax-free lump sum, re-invest, and get more tax relief
Taking their tax-free lump sum early and re-investing it in to their pension is very tax efficient. As they pay no tax on this part of the pension, by taking it and immediately reinvesting it, the client can increase the size of their pension pot because they get more tax relief. A basic rate taxpayer would get an extra £2,500 in tax relief on £10,000 reinvested and a higher rate taxpayer twice that amount.
The downside of doing this is that once they have taken their tax-free lump sum, they can’t take it again. Although they can get another tax-free lump sum on the amount re-invested. Her Majesty’s Revenue and Customs are aware of the tax advantages and have complicated rules that prevent recycling too much of the tax-free lump sum. In basic terms, don’t reinvest lump sums of more than 1% of the lifetime allowance (equal to £17,500 in this tax year) in any 12-month period, and there will be nothing to worry about.
‘Phasing in’ your pensions?
Others that should think about the change to the minimum age for drawing their pensions are those who are ‘phasing in’ their pension.
For example, those giving up high-pressure jobs in their early 50s, but continuing to work at something they find more enjoyable, often find that they have to take a cut in earnings. By taking part of their pension, they can continue to manage their budget and the gradual shift from full-time work to retirement.
Anyone aged between 50 and 55 on 6 April 2010, and phasing in their pension, may need to take action if they plan to draw more of their pension. For example, if the next planned withdrawal is due in May 2011, this can only be taken if aged 55 or over at this date.
People in this situation can bring forward any planned withdrawals between 6 April 2010 and their 55 birthday, to 5 April 2010 or earlier.
If you are concerned by this rule change and how it affects you then please do not hesitate to contact us for conflict free advice.
posted by Murray Round Wealth Management @ 10:00,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
Kirsty
Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
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