What an amazing budget for pensions! George Osborne has revolutionised planning opportunities with pensions and in turn has made them the most attractive form of saving for retirement.
The big changes revolve around how pension benefits can be taken with the proposals for next year, allowing full flexibility in emptying the pension pot at any time after age 55.
Annuities will still be the best option for some of the more cautious savers as they provide a guaranteed income no matter how long you live. For others, the ability to spend the pension fund over a short period of time will better suit spending needs in early retirement and could perhaps neatly bridge the income gap between retirement and state pension age.
For some people it may even make sense to cash in ISA funds and pay the maximum allowable into pensions due to the tax relief on the contributions and the tax-free cash available on the way out.
Care must be taken not to overfund the pension. The new lifetime allowance is due to reduce to £1.25m in April, and the annual allowance is to reduce to £40,000. Breaches of these limits incur hefty tax charges. A final salary pension of £60,000 together with a lump sum, is likely to breach this limit. Anyone in this position should obtain advice on applying for individual protection or fixed protection, which preserves the current £1.5m limit.
Any individual with children who earns over £50,000 will be aware by now that child benefit is reduced and once earnings of either parent go over £60,000, child benefit is lost completely. Pension contributions can still be used to reduce income and in turn preserve child benefit with some careful planning. Pension contributions must be received by the pension provider by April 5 in order to be effective for this tax year.
The main tax advantages of pensions still apply. These are: tax relief on contributions at the investor’s highest marginal rate; no capital gains tax on any profit; no tax on interest; no higher rate tax on dividends; no tax on property rent; 25 per cent of fund tax-free on retirement; and tax free on death before age 75 (an appropriate trust should be used to ensure benefits can eventually pass to children without any inheritance tax).
David Hill is a Chartered Financial Planner and Independent Financial Adviser at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814 or by email: firstname.lastname@example.org