Pension planning is crucial for any individual and farmers are no exception. In the first of a new series, Ben Briggs explores the changing pension landscape.
In his Budget statement in March 2014 Chancellor George Osborne announced one of the most radical reforms of retirement options for many a year, taking the UK’s highly restrictive pension regime to an extremely flexible one.
During his speech, he made the bold statement there would be ‘no caps, no drawdown limits, let me be clear, no one will have to buy an annuity’.
Ben Harrison, of chartered accountants and business advisors Moore and Smalley, said from age 55, an individual can take benefits from their authorised pension plans.
“These plans can generally provide the option to take up to 25 per cent as a tax-free lump sum, called in the industry a pension commencement lump sum (PCLS),” he said. “The remaining fund then provides an income for the rest of your life.”
But he also scrutinised the pension landscape and what it meant for farmers.
Historically, individuals were unable to withdraw the entire remaining fund as they would not know how long they would live, but needed to guarantee an income until they died. As a solution, the remaining fund would have to be used to buy an annuity, which would solve this issue.
The problem is if you die early, your family may feel cheated because the capital which had been used to buy the income in the first place has been lost. As life expectancy has increased significantly over the recent past and low-risk interest rates have fallen to all-time lows, annuity rates have never looked such poor value.
Solutions subsequently were introduced to allow individuals to keep their funds invested and, if the fund grew, this could provide for an increasing pension over time, in order to combat inflation.
On death, there could be a return of fund to the estate or spouse, albeit with a tax deduction of 55 per cent. These solutions were commonly called drawdown plans and they had annual withdrawal restrictions to prevent funds running out.
More recently, flexible drawdown was introduced. This allowed individuals over 55, with a retirement income exceeding £20,000, to draw potentially their entire remaining fund, subject to income tax at their marginal rate. However, many individuals could not meet the scheme’s criteria and therefore the income they could draw was restricted.
The new rules promise from mid-2015 everyone will have the ability to participate in flexible drawdown. This means the minimum income requirement of £20,000 per annum, and for the remainder of this year, £12,000 per annum, will be removed, allowing all individuals to take their PCLS and potentially draw the remainder of their fund as income, subject to tax at their marginal rate.
Assuming new legislation is passed, anyone facing retirement will have major decisions to make. Investing in pensions for retirement planning and other investment-linked purposes has become a very interesting option.
For those going into retirement with debt, it provides the option to draw the pension as a lump sum and pay down this debt, thus saving crippling interest payments in retirement. While it reduces the future income payable, it may make retirement, at least in the early years, much more comfortable.
This is never truer than when you consider many credit card providers charge interest rates in excess of 30 per cent per annum.
For wealthier individuals, it provides a significant degree of flexibility in the planning of retirement income and also the Inheritance Tax planning which can be effected with other assets that otherwise would have been needed.
It is important to understand at retirement it is the same sum of money which needs to provide for your lifetime in retirement, but the options have expanded. While some will rush out and ‘buy a Lamborghini’, most will understand their retirement needs and will take planning seriously.
What is clear, however, is picking the right solution, which in some cases may still be an annuity, will be a more complex task to understand and therefore high quality financial advice will be essential.