Pension scheme members are to be given greater flexibility over how they take tax-free lump sums from their pension pots.
From April 2015, members over the age of 55 will be able to withdraw a series of lump sums, dipping into their pension pot whenever they wish. A quarter of each payment will be tax free, with the remaining 75% taxed at the individual’s marginal rate.
Currently, pension scheme members can take 25% of their fund tax free as one lump sum.
The new rules are due to be set out to Parliament in a Taxation of Pensions Bill later today (14 October 2014).
Chancellor George Osborne, said: “People who have worked and saved all their lives will be able to access as much or as little of their defined contribution pension as they want from next year and pass on their hard-earned pensions to their families tax free.
“For some people an annuity will be the right choice, whereas others might want to take their whole tax-free lump sum and convert the rest to drawdown.
We’ve extended the choices even further by offering people the option of taking a number of smaller lump sums, instead of one single big lump sum.”
Mark Wood, chief executive officer at JLT Employee Benefits, said: “At a time when it is accepted that, despite auto-enrolment, pension contributions are still woefully inadequate for millions, over the long term this should encourage people to preserve the fullest retirement pot possible.
“This is the last panel in the government’s 2014 savings triptych.
“Flexibility is the key theme and, in conjunction with the annuity reforms at the Budget and the removal of ‘death tax’, it further enshrines the notion that savings are ‘my money’ to do with as people wish, rather than being steered by tax.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, added: “[These rules] have the potential to revolutionise and reinvigorate investors’ appetite for long-term savings, something which is badly needed after decades of underfunding.
“However the Chancellor is also on a reckless joyride of pension reform, it’s exciting but it could well end in the most horrendous retirement income car crash.
“In theory, it does mean that pensions could be used like a bank account, with investors dipping in to draw income at will
“It could also possibly mean investors drawing their tax-free lump sum but deferring the (taxable) balance. This balance could then be passed on to beneficiaries on death and could potentially avoid any tax charge
“Millions of pension savers are being encouraged to withdraw their money at will. This is fine as far as it goes, but managing longevity and investment risk is complicated, particularly if they have been defaulted into a pension, have never engaged with it and don’t know what [they are] doing.”