Flexible Pensions

With effect from April next year, pension savers will no longer be obliged to use their funds to provide an income for life. Luke Brooks examines the new rules.

The Government currently encourages individuals to make pension savings through a number of measures, most notably the ability to claim income tax relief on personal contributions and corporation tax relief on company contributions. Other advantages include an exemption from tax on income and capital gains generated within the fund, tax-free benefits on death before retirement, and a 25% tax-free lump sum on retirement.

The flexibility for pension funds to borrow up to 50% of their assets to acquire a commercial property that could be leased to an entrepreneur's business, and the ability, in certain circumstances, to invest in private company shares also have obvious attractions.

Despite these apparent advantages, many entrepreneurs have been wary of making significant pension provision due to the restrictions placed on the timing and the structure of the eventual benefits permitted by the registered pension regime.

Minimum age increases

It is well-documented that many early-stage entrepreneurial projects fail due to cash flow problems. For a younger entrepreneur the downside of investing in a pension over other vehicles, such as an ISA, is that no access is permitted to funds before the minimum pension age.

The minimum age for private pensions is currently 55 and will be increased to permanently sit ten years below the state pension age. Therefore, when the state pension age rises to 67 in 2028, the earliest possible access to a private pension will be at age 57.

While the uncertainty surrounding the timing of retirement benefits may dampen the enthusiasm of younger entrepreneurs, any historical concerns about the structure of the eventual pension benefits will be eradicated with effect from April 2015 and should act as a significant boost to entrepreneurial savers who already have the minimum pension age in sight.

Access to pension funds

For decades, private pension savers have been obliged to secure a 'lifetime annuity', a guaranteed income backed by an insurance company, by age 75 at the latest. The disgruntlement with this requirement grew as annuity rates dropped significantly from their peak in the early 1990s due, primarily, to reducing gilt yields and improving longevity.

Although 'income drawdown', with its income, investment and death benefit flexibility compared to an...

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