PENSION FREEDOMS 2015THE ESSENTIAL GUIDE

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THE RICHER RETIREMENT SPECIALISTS

ROD THOMAS INVESTMENT

From 6th April 2015 and beyond, the pension landscape changes enormously. New laws introduced by our Government have set in motion the biggest changes to pension legislation for perhaps 70 years.

In essence, the Government has decided to treat us like grown-ups, able to make our own decisions about our own future – with a set of flexible rules that give us great freedom in terms of how we plan our provision for retirement.

But with this freedom comes responsibility. Responsibility to ensure you make good decisions about your own future. The starting point for good decisions is understanding the changes and how they apply to your circumstances.

In this guide to the new pension freedoms we explain the major changes. Our intention is to provide information in plain English that is understandable. Nothing here should be considered advice, which can only be given by a qualified financial advisor. However we hope that you find the information valuable and useful as a first step to exploring your options and making the right decisions.

Pension Freedoms – Your next stepsWhat do you want to know more about? Here are the topics in more detail about the new pension freedoms.

Flexible access to your pension

Taking tax free cash from your pension

Death benefits – leaving a legacy behind

Pension contributions - revised rules

Taking income through drawdown

Annuities – the impact of changes

Pension Wise – the new Government

guidance service

Next Steps

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Flexible access to your pensionWhen you take benefits from your pension after 5th April 2015 the new rules mean you will have much more freedom over how you choose to take money from your fund.

You may take:All your pension fund in one lump sumPartial sums as and when you choose, orA regular income

Pension withdrawals to suit your needsThe big change is that you can now make withdrawals of capital and income without limit. You can even withdraw 100% of your fund in one transaction. However, a word of caution because this could result in a substantial tax bill.

The other major issue is that if you will need to use income from your pension in the future to live on, it is important to restrict withdrawals – leaving enough in your pension to support your income needs in the future.

If you will use your pension fund for income, then withdrawals are now very flexible, although your pension company may impose their own restrictions. From a the perspective of the ‘rules’, you can take ad-hoc payments when you need them, or set up a more regular payment system such as a monthly, quarterly, bi-annual payment system.

You may have chosen to invest in certain assets like commercial property inside a SIPP, SSAS or other scheme that allows such investments. In this case you will need to match your planned income with the availability of income from the investments you have selected. Options may not be straightforward and if you are unsure please consult a regulated financial advisor.

Tax treatment of pension withdrawalsYou can normally take 25% of your fund as a tax-free lump sum. This hasn’t changed.

Now, any withdrawals after the tax- free cash - whether withdrawn as a lump sum or as regular income - will be taxable. You will be liable to tax at your marginal (i.e. highest) rate.

You may take all of your tax-free cash in one go, or withdraw your tax-free cash over a period of time. We’ve explained the tax rules in more detail on the ‘Taking tax free cash from your pension’ page.

A big danger to be aware of is that if you withdraw too much income or capital at once, you could be pushed into a higher tax bracket. For example, you could be taxed at 40% instead of 20% on some of the money taken from your pension fund. Don’t let this happen to

you by mistake – take professional financial advice to ensure you aren’t caught in this ‘tax trap’!

What are the restrictions within the new pension rules?Some restrictions remain the same as before the changes. Other restrictions have been introduced or updated. Here’s a quick summary:

• You must be 55 before you can take any benefits from your pension fund.

• If you have pension funds in excess of the “lifetime allowance”, currently £1.25 million, you can still take flexible withdrawals but you will pay significant tax charges on any funds over the lifetime allowance. The lifetime allowance is due to fall to £1 million with effect from April 2016.

• If you already have a pension in capped drawdown (you’ll know it if you have it!) then you can use the new rules to access more income but you will not be able to take any further tax free lump sums.

• If you have certain types of lifetime allowance protection, or an enhancement to your lifetime allowance, some of the new options may not be available to you.

One really important new innovation is that if you are approaching retirement, you are entitled to a free and impartial ‘guidance’ session with the Government’s new service – Pension Wise.

You will notice that the critical word used is ‘guidance’ and not ‘advice’. This session with help you understand your options and act as a signposting service for further information. It will not, however, provide specific personal advice on suitable products or services. Learn more about the service and how to access it on our Pension Wise information page.

Taking tax free cash from your pensionCurrently most people can take 25% of their pension tax free as an up-front lump sum.

From April 2015 you can choose to either take the tax free cash all in one go or have a portion of any income paid tax free.

Example:Suppose you have a SIPP (self-invested personal pension) with a fund valued at £200,000 that you have not taken any benefits from, you may choose to:

Take a lump sum of £50,000 tax free and use the rest of your fund to provide a taxable income. You do not have to take the income immediately, and you can vary your income payments as you like. This is called ‘flexi-access drawdown’.

Withdraw your whole fund. 25% will be tax-free and the rest taxed as income, payable at your marginal rate of tax.

Withdraw part of your fund. For example; access half of your fund and take £25,000 as a tax free lump sum. Nominate £75,000 to take income. The other half (another £100,000) of your fund can be used in the future to provide you with further lump sums or to take income. In the meantime this part of the fund will continue to grow tax free within your pension.

Withdraw part of your fund as a lump sum with 25% tax-free and the rest taxed as income. The funds left

in your pension can then be used to provide benefits in the future as another lump sum or series of lump sums to provide you with an income. The first 25% of any future payments would also be tax-free, with the balance taxed as income when you withdrew it. This is called an ‘uncrystallised funds pension lump sum.’Without getting too complicated, it is also OK to mix up how you choose to use your fund.

For example, you may choose to take the first 50% (£100,000) as a lump sum, of which 25% is tax free and the balance taxable. In the future you could then take a further 25% of the remaining £100,000, also tax-free, leaving the rest of the fund in your pension to provide an income.

Taking income from your fund is called drawdown. Choosing this as an option instead of purchasing an annuity is an important decision. Much of the driving force behind these pension reforms has been the Government view that for many years annuities have offered poor value to pension savers and therefore this legislation has removed any requirement to purchase one.

However, you do need to consider the investment returns that you may be able to achieve through drawdown and the level of income that you wish to take. If you are unsure about your options you should consult a regulated financial adviser.

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Death benefits – leaving a legacy behindUp until now, a penal taxation regime impacted the value of any pension on death. In fact many pension savers worked hard to ensure that they had nothing left because of the 55% so called ‘death tax’.

The new legislation has turned this on its head and now it can be positively advantageous to leave a legacy to your loved ones through your pension fund rather than through direct ownership of assets. In fact, the changes go further than you might expect because now you can leave a legacy for your children, their children and for generations beyond that!

The big issue of inheritance tax is a key element of the decision process about planning the disposition of your estate prior to death. That decision process should now include an assessment of the benefits of your pension fund.

The dramatic changes now in force apply to who you can nominate to receive your benefits and how those benefits are taxed.

Who can receive the death benefits from your pension fund?You can nominate whoever you like to receive your death benefits. This could be your partner, children or grandchildren. You can even nominate someone completely unrelated. You may also leave part or all of your fund to charity.

Benefits can be spread how you wish – in whatever arrangement and proportion you choose. Each of your beneficiaries can receive a share of your pension fund. It is a good idea in the ‘new world’ of pensions that you complete a death benefit nomination form and ensure that it filed both with your personal papers and your pension scheme administrators.

How are death benefits paid?Beneficiaries of your pension will normally have the choice of taking the fund as a lump sum or leaving the fund invested and using it to provide an income.

If they choose to leave the fund invested they can take income when they wish. Any funds remaining invested will continue to benefit from being in the tax-free pension scheme.

Changes to how death benefits are taxedThe tax treatment of death benefits paid from your pension now depends on two factors:

1. Your age when you die.

2. Whether or not the funds are ‘designated’ to your beneficiary within two years - designating the funds just means transferring them into the beneficiaries’ names.

The tax rate no longer varies depending on whether or not you are taking your pension at the time of your death.

Death before age 75:If you die before your 75th birthday and your pension funds are ‘designated’ to your beneficiaries within two years they will be paid tax free.

If your beneficiaries choose to take income from the fund they do not need to take the money out within the two-year period but can wait and take income when required. The tax treatment is the same regardless of whether the beneficiaries opt to take a lump sum or income.

Death after age 75If you live beyond your 75th birthday, or if you die earlier but your pension funds are not designated within two years, then the death benefits are taxable.If your beneficiaries use the funds to take income, they will pay tax on the income they receive at their marginal rate. If they choose to take a lump sum it will currently be taxed at 45%.

All beneficiaries should consider the tax consequences carefully before withdrawing a lump sum. From 6th April 2016 the 45% rate will be changed to tax at the beneficiaries marginal rate of income tax, so it may be advantageous to wait until after April 2016 before any lump sum withdrawal.

What happens to the fund when the beneficiary dies?For the first time it will is possible to pass on your pension fund through many generations. This radical change means that your pension fund can be used as a legacy to provide financial support for generations to come!

How does this work? If your beneficiary has not withdrawn the entire fund before their death then the funds can be passed on again. Your beneficiary may nominate successors who they want the funds to go to following their death.

The successors will then have the option of taking the funds as a lump sum or using it to provide an income, just like the first time around.

The tax treatment of the death benefits will depend on the age of the beneficiary who was holding the pension at their death, not on how old you were at your death.

As an example, if you live to be 90 and leave the fund to your child age 60 then the death benefits payable to your child would be taxed (as you lived to be over 75). If your child took the benefits as income and the fund had not all been used before their death at age 70 then the remaining fund could be passed on to their successors tax-free as they died before age 75.

It is possible to have unlimited successors, so your pension fund could be passed on for generations if it is not all taken out.

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Pension contributions - revised rulesThe new pension’s freedom rules allow much greater flexibility in terms of how you can take your benefits.

However, restrictions are being put in place on the amount you can contribute to your pension once you have flexibly accessed your pension benefits. This is to ensure that people do not abuse the new rules by taking higher levels of income from their pension to fund further contributions back into their pension and gain large amounts of tax relief.

Annual allowanceThe annual allowance is the maximum amount you can contribute to all your pensions each tax year. This is currently set at £40,000.

If you go over the annual allowance you can make use of your annual allowance from the previous three tax years. This is provided you were a member of a pension scheme and have some of your allowance in those tax years left over.

What is changing?Once you have accessed your pension benefits using flexi-access drawdown, you can only contribute up to £10,000 to your defined contribution pensions each year. Also you won’t be able to increase your contributions through the unused contribution allowance from previous tax years.

The overall annual allowance still applies. So if you also have a final salary scheme (also known as a defined benefit scheme) you can continue to accrue benefits worth up to £40,000 a year in total, plus any unused allowance from the previous tax years. But as discussed above, the amount you contribute to all your money purchase pensions must not exceed £10,000.

This seems particularly unfair to the huge number of people saving in a defined contribution scheme. Maybe the Government will change the rules in future budgets!

This reduction to £10,000 maximum annual contributions is called a ‘restricted allowance’ and can be triggered by different events:

When is the restricted allowance triggered?

You will be affected by this new allowance when you:

• take any benefits flexibly from your pension

• exceed your income limit in capped drawdown

• take an income payment after you have told your scheme administrator you want to move from capped drawdown to flexi-access drawdown

• purchase a flexible annuity that allows income to decrease

• have previously been taking flexible drawdown (before 6 April)

You will not be affected by this new allowance if you:

• take a tax-free lump sum but no other income

• continue to take income below your annual limit in capped drawdown

• purchase a traditional lifetime annuity

• take a lump sum or income as a beneficiary of someone else’s pension

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Taking income through drawdownIf you started taking income from your pension on or before 5 April 2015 you will be taking either ‘capped’ or ‘flexible’ drawdown.

Capped drawdownUnder ‘capped drawdown’ there is a maximum level of income you can withdraw from your pension each year. This amount is reviewed every three years until you are 75 and then annually.

Now your options have changed. You can…

• continue to take capped drawdown

• move to the new ‘flexi-access’ drawdown. This allows you to take any level of income you want from your pension

Under flexi-access drawdown you choose how much income to take. However there can be substantial tax bills unless you plan carefully. Also if you withdraw too much you might find your fund shrinking until it disappears whilst you still have years of life ahead of you!

If you rely on your pension income for support, make sure that the level of income you take will ensure your fund lasts for your lifetime. This can be difficult to calculate.

As we’ve already discussed. if you switch from capped drawdown to flexi-access drawdown the maximum annual contributions to your pension reduces to £10,000.

Flexible drawdownAnyone taking ‘flexible drawdown’ on 6th April 2015, will be automatically moved to ‘flexi-access’ drawdown.

This makes no difference to the access to your benefits since you could already draw what you want, when you want. However the new £10,000 annual contribution limit will now apply.

For details. Our case study shows how this change will take effect.

Tax treatmentIncome from your pension is taxed at your marginal rate of income tax. If you increase your level of income this may put you into the next tax bracket, meaning you pay a higher rate of tax.

Example:

Suppose you still have £40,000 a year of earned income when the personal allowance is £10,000. You would be paying tax at 20% on a net £30,000.

However, if you decided to take £20,000 of income from your pension, your total income for tax purposes is £60,000, less the £10,000 personal allowance means taxable income of £50,000.

This is over the threshold for 40% tax which is set, for the 2015/2016 tax year at £31,785. Therefore you would be liable for tax at 40% on £50,000 - £31,875 = £18,125 of income. This means your tax bill will include an extra £3,625 tax because you have taken yourself into the higher rate band.

The important message is to be aware of the tax consequences of taking income from your pension and if you are able, consider from year to year how best to minimize the tax due by perhaps taking more pension income in years where other income is lower.

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Annuities – the impact of changesUnder the pensions freedom changes the rules on annuities are being relaxed.

Annuities provide pensioners with a guaranteed income for life. This comes at the very heavy cost of ‘selling’ your fund to an insurance company. The Government has long recognised the very bad value that annuities offer to prospective retirees and this fact has been one of the main driving forces behind the radical new pension freedoms.

The bottom line is that no-one is required to purchase an annuity, and as a result annuity sales have collapsed. There will be occasions when an annuity purchase is still the best option, but if you are considering one please shop around for the best deal and make sure you have explored all options before committing yourself.

This is also an area where specialist professional advice is to be strongly recommended.

It is possible to use just some of your pension fund to purchase an annuity and choose other retirement options with the remainder of your fund.

Not yet on the statute book but under consideration by the Government is a change in law that will allow people who have purchased annuities to effectively sell them back to the insurance company. This would give people stuck with annuities and urgently needing a cash lump sum the ability to undo a previous decision and end up with a fund.

We need to wait and see if this legislation arrives and how it will work, but more flexibility in the pensions marketplace is always welcome.

Traditional annuitiesTraditional annuities can be level or they can increase over time. Future increases can be at a fixed rate, or in line with inflation, like RPI (retail price index). Traditional annuities are not permitted to decrease except for very limited, specific circumstances.

You can use your pension fund to purchase a traditional annuity that will provide you with an income for the rest of your life.

You can opt to have a dependant’s pension included, usually for your spouse, so the pension can continue to be paid to them if they outlive you. This can be at the same level, or at a reduced level, for example 50% of the pension paid to you.

You may also choose an annuity with a guarantee period of up to 10 years. If you die within the guarantee period then your pension can continue to be paid to your beneficiary until the end of the period.

New flexible annuitiesWith the introduction of the new pension freedoms, we expect more innovation in this area and hopefully greater value for potential clients. One example of extra flexibility is that now annuities can decrease as well as increase. If you choose this option then it will be stated in the contract when you start the annuity.

Choosing an annuity that decreases might be a good idea for someone who is expecting their income needs to drop at a later date, for example when they pay off their mortgage or start receiving income from the state pension.

If you purchase an annuity that allows decreases in income this will be classed as flexibly accessing your pension benefits and the amount you can contribute to your pension will be restricted to £10,000 as we have discussed.

The new more flexible rules also allow guarantee periods for annuities to be longer than 10 years.

Tax treatmentAll annuities are taxed at your marginal rate of income tax.

Death benefitsUnder an annuity contract death benefits (if any) are in the form of a guarantee period or dependant’s pension. Once any guarantee period has expired and on the death of a dependant (if a dependant’s pension has been included), there will be no further death benefits.

Most importantly, when you purchase an annuity you lose your fund – that’s the ‘purchase price’ of the income for life. This is in contrast to drawdown, where you keep ownership of the fund and live on the income it generates.

Pension Wise – the new Government guidance serviceThe new pension freedoms offer far greater flexibility in how you access your pension than ever before. And many more choices that do complicate the landscape.

To help you understand the options and make the right choices, the Government has introducted a new service – Pension Wise – which we recommend that you benefit from.

What is the Pension Wise service?Pension Wise offers free, impartial guidance that can help you understand the options available to you when you come to retire. It is not a substitute for full, financial advice.

So the service explains options but does not recommend specific products or investments. There is a very clear line between guidance, offered by Pension Wise, and pensions advice which can only be given by a regulated financial advisor.

You can access the guidance online, over the telephone from The Pensions Advisory Service and face-to-face at your local Citizens Advice Bureau at no cost.

The Pensions Wise service is designed for people approaching retirement and is available at zero cost!

To access the Pension Wise service simply go to www.pensionswise.co.uk to get started.

Note that Pensions Wise will provide appointments for people who are approaching the age of 55 and have a defined contribution pension. They do not deal with defined benefit (also called final salary) pensions. You can get advice about those from The Pensions Regulator www.pensionsadvisoryservice.org.uk

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Next Steps

Thank you for reading this Special Report. I hope you have found it interesting and valuable.

Gemini Business Centre136-140 Old Shoreham RdHove BN3 7BD United Kingdom

01273 447 2990800 612 0880invest@avantiswealth.comwww.avantiswealth.com

Contact details

If you have any questions about your final salary pension please email me: Rod Thomas, rod@avantiswealth.com

I will always reply personally.

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DISCLAIMER

Avantis Wealth Ltd is not authorised or regulated by the Financial Conduct Authority (FCA).

Avantis Wealth Ltd does not provide any financial or investment advice. We provide a referral to a regulated advisor who will offer appropriate advice, or to the company offering an investment who will determine your suitability for the investment prior to any offer being made. We strongly recommend that you seek appropriate professional advice before entering into any contract. The value of any investments can go down as well as up and you might not get back what you put in. You may have difficulty selling any investment at a reasonable price and in some circumstances it might be difficult to sell at any price.

Do not invest unless you have carefully thought about whether you can afford it and whether it is right for you and if necessary consult with a professional adviser in accordance with the Financial Services and Markets Act 2000. These products are not regulated by the FCA or covered by the Financial Services Compensation Scheme and you will not have access to the financial ombudsman service.

Information is provided as a guide only, is subject to change without prior notice and doesn’t constitute an offer of investment. Some investments may be restricted to persons who are high net worth, sophisticated or professional investors or who take independent advice from an authorised independent financial advisor.

THE RICHER RETIREMENT SPECIALISTS