Pensions freedom is now!

As the frenetic activity of tax year end has now subsided thoughts now turn to 2015/16. Radical changes affecting savings and financial advice may lead to conventional wisdom being turned on its head.

You now have more control, choice and responsibility over your retirement savings than ever before. Youll need help to understand what this means at every step of your retirement journey, from saving towards retirement, taking an income and preserving whats left for your families.

Heres a quick reminder of what has changed from 6 April 2015.

Income flexibility

Pensions are now instantly accessible for the over 55s. Essentially the new rules introduce flexible drawdown for the masses.

Providers offering flexi-access drawdown will allow you to take as much or little as you want from your pension whenever you want it and however you want to take it.

Uncrystallised Funds Pension Lump Sums (UFPLS) have been introduced as a way to allow some older schemes which dont offer drawdown access, at least in part, to some of the new flexibility.

If UFPLS is the only available flexible income option, it means that its not possible to take some or all of your tax free cash and defer taking an income – so UFPLS triggers the drop to a 10k annual allowance with no carry forward for money purchase schemes.

Theres also some additional flexibility for annuities – income will be able to go down as well us up from April and guarantees of more than 10 years will be possible.

On death before age 75, survivors annuities can be paid to any beneficiary (no longer just dependents) tax free where:

• income payments start on or after 6 April 2015;
• the date of death was after 2 December 2014; 
• and, if provided from uncrystallised funds, it comes into payment within two years of death

Reduced Annual Allowance for taking flexible income

The price for accessing the new flexibility is that the annual allowance is cut to 10,000 for money purchase schemes. But the full 40k allowance can be maintained if just tax free cash is taken or for anyone already in capped drawdown prior to 6 April 2015 who remains within the income limits.

Pension Death Benefits

The 55% tax charge on drawdown lump sum death benefits has been scrapped. Its possible for anyone to inherit a drawdown pot and continue drawing an income from it, removing the previous restriction that only dependants can carry on in drawdown.

• On death before 75, death benefits (except scheme pensions) can normally be paid tax free within the Lifetime Allowance (LTA). In a change from the original proposals, this now applies to survivors annuities and pension guarantee payments as well as inherited drawdown pots.
• On death at 75+, death benefits will be taxed as the recipients income, when they draw the funds. For 2015/16 only, non-drawdown lump sums will be taxed at a flat rate of 45% – but income tax will apply to all post-75 death benefits from 2016/17 onwards.
• The old tax distinction between crystallised and uncrystallised pots has largely gone. Within the LTA, the tax treatment will normally be determined by the deceaseds age at death. 
• Any individual beneficiary of a flexible pension can choose to keep their inherited pension pot in the drawdown wrapper and decide when (or if) they draw down on it.

These changes make pension wealth far more inheritable than ever before. But its important to ensure that your current pensions will allow you to access the flexibility you need before its too late.

Defined Benefit (DB) Defined Contribution (DC) Transfers

Transfers from unfunded public service DB schemes to DC schemes will be blocked, unless the transfer request was made before 6 April 2015.

Its now only possible to transfer private sector and funded public schemes, such as the Local Government Scheme to DC schemes.

ISA Inheritability

Spouses and civil partners whose partners died after 3 December 2014 are now eligible for an increased ISA allowance equal to their late partners ISA value at the date of their death.

This will allow the survivor to continue to benefit from tax free investment returns. The spousal IHT exemption will mean theres no IHT due if the surviving partner inherits the ISA funds. But those funds will be an asset of their estate.

Savings rate band changes

The savings rate band has been more than doubled to 5,000 and the rate cut from 10% to zero. For a non-taxpayer this could mean a tax free allowance of 15,600 when combined with your usual personal allowance.

It could be good news for some offshore bond savers as gains from offshore bonds are treated as savings income. And if youre able assign to a non-taxpayer or manipulate your income under the pension freedoms to make yourself a non-taxpayer, then some of the gains could become tax free.