Casualties of the pension revolution
1st October 2014
According to The Sunday Times there are a number of individuals who may become a casualty of the new pension revolution announced by George Osborne earlier this year, particularly those over the age of 55. In April of 2015 pension savers aged 55 and over will be able to remove their pension pots early, however there are warnings that the ability to remove the entire pension could backfire.
Currently those aged 52 and over who become bankrupt can have a 25% tax-free lump sum taken from their pension by creditors. The other 75% is protected by the Welfare Reform and pensions Act 1999. However the new ability to take the entire pot in cash means that the whole amount is potentially available to creditors, resulting in the pension no longer being protected and those that are over 55 and bankrupt being left with no pension fund. According to the Insolvency Service, in 2013 more than 4400 people in England and Wales aged 55 and over became bankrupt so this reform will have an impact on many people. However those under the age of 55 in the same situation will not have their pensions touched and some may see this as unfair.
The pension of a small business owner is also currently off limits in the event of bankruptcy providing the business owner with income later in life. However with these new changes the advice from Heath at Derbyshire Booth, is that a business owner should avoid having the entire pension in their own name, and instead some partially in the name of a spouse as creditors can only chase the business owner and their assets directly.
In contrast to the negative reports of the new reforms, the government advisor Ros Altmann said that people who reach the age of 55 can actually use their pension assets to repay the owed debts to avoid bankruptcy altogether, so the new rules may in fact benefit a small group of individuals who potentially face bankruptcy.
George Osborne has also recently announced that with the new tax changes if an individual dies before the age of 75, there will no longer be a 55% tax on the transfer of the pension to any beneficiaries. This also means that the beneficiary will be able to withdraw various amounts from the fund without paying tax on the amount.
Although the reforms will have some impact on most, this announcement does not affect everyone. The majority of public sector workers including teachers, NHS staff, police and the armed forces will be banned from removing their pensions.