The new pension rules: what they mean for you

Published by Mark King on 22 April 2014.
Last updated on 22 April 2014

Tin full of coins

One of the highlights was the announcement that people will be able to invest up to £15,000 in a tax-free New Isa - in any combination of cash or stocks and shares. The Nisa will replace cash Isas and stocks and shares Isas on 1 July 2014.

But more surprising - perhaps even revolutionary - was the government's decision to do away with compulsory annuities. From April 2015, you will no longer have to buy an annuity when you cash in your pension pot; instead, you will have total freedom over how you withdraw your money.

This will cheer millions of people who thought they would be forced to convert their money purchase - or defined contribution (DC) - pension into a poor-paying annuity when they retire in the next few years.

The Chancellor also announced some changes to pensions that were introduced almost immediately, in late-March. So here's our guide to the changes and how you can join the pensions revolution:

Pension changes now in force

  • New rules that allow savers to take more cash from their pensions came into force on 27 March. The changes will allow more savers with small pensions to take their pots as cash and enable investors using drawdown arrangements to take a higher income.
  • Savers with pensions worth up to £30,000 can now take the money as cash. They will also be able to take three funds worth up to £10,000 as cash, as well. Under the old rules, only two pots worth up to £2,000 could be cashed in.
  • Of the money you cash in, 25% can be taken tax-free with tax charged on the remainder at your marginal rate. Tom McPhail, head of pensions research at Hargreaves Lansdown, said the change will spare savers from buying poor-value annuities that could only pay a few pounds every week.

"Reforming the small pots rule will help to unlock improvements right across the pension system," he explained. "Small investors will get their money back; insurers will be able to sell better value annuities to large customers and it will help to minimise auto-enrolment opt-outs."

  • The income drawdown rules have also been relaxed. The level of income investors can take has been increased from 120% of what they would have been able to achieve with an equivalent annuity, to 150% – enabling them to draw down more cash from their pension.

However, McPhail warns investors shouldn't be tempted to take too big an income. He said: "It is important for investors to remember that new income limits haven't changed the fundamental principles of investing. If you draw the maximum income, you will probably run down your pension fund."

These limits do not apply to investors in flexible drawdown, where there's no limit on the amount you can draw from your pension scheme in any year. However, to qualify you had to be in receipt of a guaranteed income of £20,000 a year – this has been reduced to to £12,000, benefiting around 85,000 pensioners.

However, the above rules may well be further amended or removed entirely after the government has consulted on wide-reaching changes it intends to implement in April 2015.

McPhail added: "If in doubt, investors should review their current retirement income plans. For many people, an annuity will still be the right answer. However, we expect insurance companies to be forced to work a bit harder for investors' money."

April 2015 changes

  • Next year, retirees will be free to take control of their pension to try to secure a decent income in retirement. From April 2015, the government will allow you to take your money purchase (DC) pension pot as cash.

At the moment, you can take a maximum of 25% of your pension pot as a lump sum, free of tax. But from next year you can take the full amount or you can buy an annuity with it or leave it invested so you can draw an income from those investments.

It remains to be seen whether any rules will be tweaked for final salary scheme members who might wish to opt for a cash sum.

Until July, when the government's consultation into all of the above is released, we do not know exactly what rules will be brought in or how the industry will respond.

Moneywise will be watching.

The Nisa

Until this summer, people have been forced to split their tax-free savings between the two types of Isa, with the limit for stocks and shares Isas set at £11,520 in the 2013/14 tax year and the maximum for cash Isas set at £5,760.

While those limits changed on 6 April to a respective £11,880 and £5,940 for the 2014/15 tax year, the government announced the introduction of the New Isa or Nisa that raises the total limit to £15,000.

From that date, savers will be permitted to hold the full amount in cash, stocks and shares, or a combination of the two - in a single Isa. In another significant change, savers will also be able to transfer their funds from a stocks and shares Isa to a cash Isa for the very first time.

The government also announced it will raise the maximum amount savers can invest in a Junior Isa (Jisa) or Child Trust Fund from £3,720 to £4,000 on 1 July.

In response, product providers have been announcing a raft of new rates.


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