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UK Pensions: The Road Ahead

24 April 2015

Initially proposed by the Chancellor of the Exchequer in his March 2014 Budget and confirmed in the Taxation and Pensions Bill published on 14 October 2014, 6 April 2015 saw some very significant changes in the way that people can draw from their pension funds.

The key change is that there are now no restrictions on what can be drawn from a pension fund (from age 55). As before, in the majority of cases, up to 25% of the fund value may be taken as tax free cash. However, since the recent changes took effect, policy holders may also be able to make more subsequent withdrawals – as many as you like – with the capital withdrawn being treated as income in the year it is withdrawn and thus taxed at the recipient’s highest marginal rate.

It is not surprising that the new rules are impacting on people’s views of pensions as part of their financial planning. Pensions are looking much more attractive to savers with up to 45% tax relief on personal contributions, up to 25% of the value available tax free (from 55) and no restrictions on how the remainder is drawn.

Some considerations for divorcing couples:

If the marriage is in difficulty:

Is there a risk of dissipation on one spouse’s 55th birthday or after that event to the potential detriment of the other spouse?

Are couples contemplating divorce more likely to be pro-active before the pension holder’s 55th birthday to prevent the risk of dissipation or to preserve assets?

Where the entirety of funds can now be taken as cash (albeit some taxed), is there not an argument to say that such funds should be treated as non-pension capital assets and could assist in funding a fair and equitable financial divorce settlement?

Is it more likely that pensions will now be treated far more like capital as opposed to a deferred income scheme?

Death tax:

The position now is that:

If you die before age 75 and have not taken any tax free cash or income, your beneficiaries on your death can take the whole pension fund as a tax free lump sum or draw-down a tax free income from it.

If you die at age 75 or over, tax is payable upon withdrawal of the money by the beneficiary at their highest marginal rate of tax or 45% if the lump sum is taken in the tax year 2015/2016.

Despite these rather sweeping changes, the ability to draw-down some or all of a pension fund should still be approached with caution and not without financial and legal advice.