Pensions in 2015

by Dr. Ros Altmann

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After the stunning revolution in pensions during 2014, the implementation of many of the new freedoms and flexibilities will begin during 2015. 

It is impossible to overstate the importance of the pension changes that have occurred in 2014.  The Chancellor has swept away decades of restrictions and opened the way for more freedom and choice to make pensions more user-friendly.  Such changes were long overdue. 

We have had one of the most complex and inflexible pension systems in the world.  It worked pretty well for the wealthiest pension savers, those who could amass huge sums in their funds, but suddenly the draconian restrictions have been swept away and pensions can become adaptable to suit different people’s circumstances.

It is important to note, however, that not everyone will be able to take advantage of the new freedoms.  For example, if you are already getting a pension there is much less opportunity to benefit.  Also, importantly, if you have a pension from one of the major public sector schemes – the NHS, teachers or civil service – then you are unlikely to be able to cash in your pension entitlement because these schemes are unfunded – in other words there are no assets set aside to pay the future pensions, so you cannot just take your share of the assets out.  If you have worked in local government, however, you are in a scheme which is funded, so will be included in the new freedoms.

The main changes are:

• From age 55, you will no longer be forced to buy an annuity or income drawdown product with your pension fund.  If you wish to, you can take the cash, or you can just take some of the money out and leave the rest for later. 
• If you are in a final salary type scheme, you can ask your trustees to give you a transfer value and can move your fund to a personal pension scheme – but be careful before doing this because you will be giving up valuable pension income that is guaranteed by your employer’s scheme. 
• Once you reach your scheme’s pension age – which can be any age from 55 onwards, you will also be entitled to free, impartial pensions guidance, to help you decide what is best to do.  Make sure you look out for this new guidance service and use it before making any decisions about your pension. 
• Pensions have also become far more attractive to pass on to the next generation, as the 55% penalty tax that had to be paid when passing on unused pension funds has been abolished and pensions can now be inherited free of inheritance tax.  If you die before age 75, the money is passed on to anyone free of tax altogether.  If you die after age 75, those who inherit the money will pay tax on any money they take out as if they had earned that money in the year they withdraw it.  This makes it very attractive to keep money in pensions as long as you can, as the fund grows free of tax and is treated more favourably than most other savings when you pass away.

The best thing you can do is probably to pay for expert independent financial advice, as pension decisions are very complicated.  It is usually worth paying unless you really understand the taxation of pensions and investment, as well as long-term financial planning.
Here are a few tips for you to think about for your pensions in the new year.

1) Make sure you trace any old pensions

There are so many of us who contributed to pension schemes many years ago, or were in an employer scheme for a short time but have not heard from the scheme.  The Government estimates there could be £3billion in lost pensions.  For example, I you have moved house and did not tell your pension scheme your new address, they have no means of contacting you.  Think back over the years and try to remember any schemes you were in.  Even if you have no records, your scheme may be able to find your data.  It’s your money and you can contact the Pensions Tracing Service at https://www.gov.uk/find-lost-pension or phone them on 0845 6002537 (+44 (0)191 215 4491 from outside the UK).  You can also look up http://www.pensionsadvisoryservice.org.uk/pension-problems/making-a-complaint/common-concerns/lost-pensions

2) Make sure you tell your pension manager who should inherit your pension fund if you pass away

The Chancellor has tipped the tax scales in favour of pensions by doing away with the 55% death tax charge.  As I mentioned before, your unused pension funds can be inherited free of tax in most cases.  But this only applies if you have told your pension company who to pass your fund onto.  If you have not nominated someone to inherit your fund, then the money will go into your estate and subject to inheritance tax.  So it is vital that you contact your pension company to nominate a beneficiary.

3)Think about pensions for your children or grandchildren?

You may not realise it but you can put money into pensions even if you do not pay any tax, or you can contribute on behalf of someone who is a non-taxpayer, and still get tax relief!  You can put up to £2880 into a pension fund every year and receive the benefit of 20% tax relief, taking the total going into a pension fund for non-taxpayers up to £3600.  Whether it is for your children, your grandchildren or a partner who isn’t earning at the moment, there could be good reasons to pay into a pension on their behalf.  The Inland Revenue will add up to £720 of ‘free’ money to the fund on top of your own contribution.

4) You may want to check whether you can contribute more into pensions

Most people, but particularly if you are a higher rate taxpayer, will find pensions are probably the most tax efficient form of savings, especially if you are near or already over age 55.  If you have not yet reached your £1.25million lifetime limit, and you have not contributed the full £40,000 annual allowance, you can put more money into pensions.  You can also carry forward allowance from the past couple of years as well.  As long as your earnings are high enough, you can take advantage of the tax relief and the very favourable inheritance tax benefits.  It may even be worth moving other savings into pension to build up a bigger fund for the future.

5) Consider using ‘salary sacrifice’ for your pension contributions

Salary sacrifice is way of saving money for yourself and your employer when making pension contributions.  Basically, with a salary sacrifice scheme, you agree to take a lower salary but the amount you have ‘sacrificed’ can be paid into your pension fund by your employer.  The advantage is that both you and your employer pay lower National Insurance contributions, so you and your employer save both tax and national insurance straight away – and you will also have a potentially larger pension later on.  It’s worth asking your employer about it because in most cases, it’s the sensible thing to do, although it could impact your life insurance cover and mortgage eligibility so make sure you get advice if you’re not sure what’s best.
Finally, it is worth mentioning that it is possible a new Government will change the rules in future, so make the most of pensions while you can.
I wish you a very happy, healthy and successful year in 2015!