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Thursday 4 December 2014
Under present rules, most DC savers approaching retirement face one main decision: when to start taking an income from their pension. From April 2015, the changes introduced in the 2014 Budget open up a range of exciting opportunities.
Members of DC arrangements will have freedom to decide not just when, but also how to start drawing their pension. From age 55, members can choose to take lump sums (single or periodical), income (secure or flexible), or a combination of the two. They could even take the whole pension fund as cash in one go. Other than the 25% usually available tax free, withdrawals will be taxed as income at a member’s highest rate.
What it means for DC comms
DC communications will need to show how the new rules differ from the existing system of using the accumulated fund to buy an annuity (after taking 25% tax-free cash). If communicated successfully, the Budget 2014 changes will result in better informed and better engaged members, who view their DC fund as an opportunity to make long-term tax-effective savings that will help secure their future, and may also have inheritance tax advantages.
Members will also need guidance on the concept of drawing down their DC fund to maximise tax efficiency and how this can allow them to move away from the ‘cliff-edge’ retirement concept and avoid working beyond (or too far beyond) their normal retirement age.
The choices members make will have their own sets of benefits, risks and implications. With freedom comes responsibility – and explaining that will form the nucleus of a successful communications methodology.
The big change will come in April 2015 when everyone over the age of 55 will be able to access their entire pension pot.