The Chancellor’s Autumn Statement for 2012 which was announced last week, included changes to both the amount of tax relief available when saving for a pension and an increase to the amount available under income drawdown plans. The Statement also announced the rate of increase to the basic State Pension for next year.
With effect from 6 April 2014 the Lifetime Allowance limit will reduce from £1.5 million to £1.25 million. This is the value of pension provision an individual can save for over their lifetime without attracting tax penalties. In addition to this, the annual tax free allowance will be reduced from £50,000 to £40,000. This is the amount an individual and their employer can pay into a pension pot before attracting tax.
However, there was good news for pensioners with income drawdown plans. There will be an increase to the capped drawdown limit for pensioners from the current 100% of GAD limits to 120%. This is the maximum amount of income that can be drawn from income drawdown plans and represents 120% of the equivalent annuity. This will be welcome news to many pensioners whose incomes have been reduced because of changes to pension policy in recent years.
Pensioners will be able to receive up to a fifth more income under these plans which allow their pension investment funds to be left intact while income is in effect generated from the underlying assets. For these savers, rather than using their pension fund to buy an annuity, they instead opt for income drawdown and keep ownership of their pension investment fund.
There are risks with such schemes one of them being that volatile stock markets could see the value of drawdown schemes fall.
From 6 April 2012 the basic State Pension will increase by £2.70 a week to £110.15 a week, representing an increase of 2.5%.