New Pension Rules

Contractor Pensions

In what is arguably the biggest upheaval in pensions history, investors have been given the opportunity to take complete control of how they access their nest egg and this has resulted in a renewed eagerness amongst Contractors to discuss what had, to some, become a discredited investment option.

For the first time, pensions offer Contractors both upfront tax savings when you contribute and the scope for generous tax savings when you decide to access an income in retirement.

No longer are Contractors forced to take out an annuity, nor are you restricted on how and when you take out 25% of your pension as a tax free lump sum. On top of all this good news is the opportunity to now start seriously considering pensions as a means of estate planning as your family will no longer pay a hefty tax bill if they inherit your nest egg.

In this brave new world for pension’s freedom you can make your investment fit perfectly with your individual tax planning needs, both now, at retirement and after your death.

The ‘Bank Account’ pension

Unveiled in Parliament last spring, Contractors will now have the option of drawing multiple lump sums direct from your pension fund known as ‘Uncrystallised Lump Sum payments’. This allows you to take ad-hoc payments without the requirement of drawing all of your 25% tax free lump sum in one go. The lump sums could be part taxable income/part tax free cash and will be similar to what is currently available via ‘phased’ retirement – the main difference being there is no cap on the income. It is important to note that this is not allowable from drawdown funds however so Contractors that are already retired and in drawdown may not be able to benefit.

This new pension rule was dubbed the ‘bank account pension’ by the media because it will allow complete flexibility to Contractors wishing to take several smaller withdrawals rather than a single lump sum and will therefore resemble a savings account but with tax incentives.

In addition there will be tax planning opportunities a plenty as we could, for instance, draw down just enough of the non-tax free element of your fund each year to remain within the personal allowance. This would mean that, with proper planning, clients could enjoy an entirely tax free annual pension income in future.

The Lump Sum Pension

Post Budget 2014, Contractors have now been given the ability to access all of your fund as a lump sum. The maximum amount that you can release tax free remains at 25% but you can now withdraw all of the remaining funds which will be subject to income tax at your marginal rate. This will be particularly helpful for Contractors with small pots and will effectively end the previous rules around taking benefits under so called triviality rules.

Long term income needs will still be paramount but the flexibility will certainly be there to pay off interest only mortgages or other debt or perhaps invest in a lifestyle business to ease the way into early retirement.

The cap free pension

In the past those Contractors who were unhappy to hand all of their money to an insurer to buy a rigid annuity at retirement could opt for ‘capped income drawdown’ instead, where the money remained invested and an income could be drawn off as required.

Income limits were linked to Government Actuary Department interest rates, which were essentially very close to annuity rates and governed by your age, sex and 15 year gilt yields. You now have the option to draw any level of income you would like to suit your circumstances.

To allow ‘flexible drawdown’ access, whereby the entire fund could be en-cashed, the requirement used to be that you needed to have a minimum of £12,000pa secure pension income and this has been abolished which is fantastic news for Contractors with a smaller ongoing pension.

If you are already in capped drawdown, you will have the option to convert to the new flexi-access rules if you wish. However, by doing so you would lose your current annual allowance of £40,000 as it would revert to the new £10,000 allowance (known as the money purchase pension allowance) for Contractors who enter the new flexi-access arena, or take the Uncrystallised Pension Lump Sum.

The generational game pension

Death benefits post April 2015 will be tax free for any Contractor that is under the age of 75 at time of death. This will include any benefits that were previously in a drawdown arrangement which were previously taxed at 55% if inherited as a lump sum. Post 75 pension benefits will be taxed at the dependant’s marginal rate of income tax.

A dependant will be able to draw any death benefits under the new flexible rules, so it would not have to be taken as a one-off lump sum which allows your loved ones the flexibility of using your nest egg as and when they need an injection of capital. This will be especially beneficial for your family if you pass away after age 75 as they could reduce their overall tax liability on the benefits.

If you choose to purchase an annuity, they will have no cap on guaranteed periods post April 2015. This means that potentially a dependant could continue to receive the full income, rather than a reduced pension on your death, for a much longer period. Any annuities with capital protection will pay out a tax free lump sum benefit before the age of 75.

These changes to the way in which a pension is inherited and taxed will make a significant difference to Contractors hoping that your hard earned nest egg will end up in the right hands if you are no longer around. So there are now real tax benefits at both ends of the pension timeline.

The Pension revolution

With this massively increased flexibility surrounding how you access your pension funds, there has never been a better time to explore the opportunity for upfront tax savings on your pension contributions today. You can still invest up to £40,000 per tax year either personally or via your limited company which can reduce a corporation tax bill. You can now even utilise your pension to leave a lasting legacy for your time contracting which will provide an income for retirement and could leave a substantial inheritance for your loved ones.

For any queries, please fill in the Request a Call Back form on this page or simply write to us at [email protected]

The value of investments may fall as well as rise and past performance is not a guide to future returns. Financial advice is given by Contractor Financials, which is a trading name of Contractor Financials Ltd and is regulated and authorised by the Financial Conduct Authority.

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