Important Changes from 6 April 2015 on Taking Benefits

There has been a great deal of media comment about the sweeping pension changes coming in April over the way you can access your pension savings. We just want to take a moment to clarify some of the hype.

1. The Current Position

1a) Taking Benefits

Presently, you have to be at least 55 years old when you want to take your benefits (rising to 57 in 2028). You don’t have to actually retire any more and you have a number of options: you can buy an annuity (and various forms exist, such as enhanced, ill-health, investment linked, and the usual ones); or, you can access an investment-linked income vehicle. This latter option is typically referred to as an “income withdrawal or drawdown” product but—although less popular—can also include a phased retirement vehicle. They have the same thing in common, however, in that your income is paid from your still-invested funds once you have taken any tax-free cash to which you’re entitled.

Typically, 25% of your fund is payable as a maximum tax-free cash sum with 75% then being earmarked to provide income. For the income drawdown product, you can select a maximum income that is calculated by reference to your age, fund value and an official government table. The minimum is nothing. These limits are reviewed every 3 years until age 75 and annually thereafter. Of course, you have the option to buy an annuity at any time if income drawdown no longer suits your circumstances. Any income is taxable under PAYE.

Example Mr Smith, 65, currently has £100,000 in his pension fund and he wishes to access it via income withdrawal. He is entitled to a tax-free cash sum of £25,000 and, based on figures as at 24.2.15, a maximum gross taxable income of £5,962.50 pa, reviewed in 3 years’ time. The minimum he can take is nil.

1b) Death Benefits

On death before taking any benefits before age 75

Your fund is usually available to be distributed (potentially tax-free) among your beneficiaries at the trustees’ discretion, or your financial dependant (inc spouse/civil partner) can take a taxable income or annuity. At this point, it’s worthwhile reminding that it’s essential to keep your expression of wishes up to date.

On death after taking any benefits before age 75

There are 3 options: 1) your financial dependant (inc spouse/civil partner) can continue taking taxable income withdrawals from the fund; 2) they can buy a taxable annuity; or, 3) the entire fund can be taken as a lump sum less a free-standing 55% tax charge.

On death after age 75

Whether you have taken benefits by this age or not, then the options remain as above + a 55% tax charge, i.e. you are treated as having taken benefits.

1c) Maximum Pension Contributions

The maximum you can contribute in the 2015/6 tax year is £40,000.

So, what’s changing?

2. The Position from 6.4.15

There are a number of very important changes.

2a) Taking Benefits

Firstly, if you take your tax-free cash up to the usual maximum of 25% of your fund value and access an income drawdown product with the remaining 75%, as present, you should note that there will no longer be any maximum income limit, i.e. you can tell us how much you want to withdraw as opposed to the government dictating it.

Example Mr Smith, as above, would still have a maximum tax-free cash sum of £25,000, £75,000 is still earmarked for income provision but now there would be no limit imposed on his annual pension. Any income would still be taxable under PAYE.

New Pension Capital Withdrawal Option (Uncrystallised Funds Pension Lump Sum or ‘UFPLS’)

Secondly, if you want to take your entire fund—or part of your fund—as a one off lump sum at any time, this is now possible. What will happen is we will calculate any maximum tax-free cash entitlement (typically 25%) and the remaining amount will be taxed under PAYE at your highest marginal rate. This means you may end up paying significantly more tax as you potentially cross thresholds in to the 20/40/45% tax brackets or have personal allowances/benefits clawed back. We would always recommend seeking appropriate taxation advice beforehand.

Example Mr Smith decides instead to take advantage of the new pension capital withdrawal rules, as above, and take his entire fund as a lump sum. He still receives a maximum tax-free cash sum of £25,000 but this time £75,000 is paid via PAYE in addition to any other taxable income he may have. Mr Smith would have exhausted his pension savings unless he has other pensions or savings elsewhere.

2b) Death Benefits

On death before taking any benefits before age 75

The situation remains as above but your beneficiaries (note: not the same as a financial dependant) can now take a tax-free income or buy a tax-free annuity.

On death after taking any benefits before age 75

There are 3 options: 1) your beneficiaries (but note again the distinction to financial dependant) can take tax-free income withdrawals from the fund; 2) they can buy a tax-free annuity; or, 3) the entire fund can be taken as a tax-free lump sum.

On death after age 75

Whether you have taken benefits by this age or not, then 1) your beneficiaries (but note again the distinction to financial dependant) can take taxable income withdrawals from the fund; 2) they can buy a taxable annuity; or, 3) the entire fund can be taken as a lump sum less a free-standing 45% tax charge (2016/7 proposed to be at their marginal tax rate).

2c) Reduced Maximum Pension Contributions

If you take advantage of the new income withdrawal or pension capital withdrawal options described in 2a) above, the maximum you may contribute will reduce to £10,000 in the 2015/6 tax year.

2d) Pensions Guidance

As individuals have been granted greater freedom over retirement benefits, the government has introduced free, impartial guidance to help people make informed decisions:

  • Pension Wise (www.pensionwise.gov.uk)
  • face-to-face through Citizen Advice Bureaux
  • via telephone with The Pension Advisory Service.

3. What Happens After 6.4.15 if I’ve Already Accessed My Pension Savings?

3a) Maximum Income

Whether you’re in receipt of an income or you’ve only taken your tax-free cash, you will be able to benefit from the new income rules. You will need to contact us in writing as the changeover is by no means automatic; the default position is that you will remain on the old rules.

You might like to consider that under the existing rules your income has to be reviewed every 3 years before age 75 and annually thereafter, which involves payment of a fee for the review and may also include expensive property valuations in addition. If, however, you do switch, there is no way to revert to the old rules and you will be subject to the reduced maximum pension contribution limit in 2c) above.

3b) Death Benefits

The changeover to the new death benefit rules is automatic but we would again urge everyone to review their expression of wishes as you are no longer restricted to just financial dependants.

 

IMPORTANT NOTES
1. WE ALWAYS RECOMMEND YOU RECEIVE INDEPENDENT SPECIALIST FINANCIAL / TAXATION ADVICE APPROPRIATE TO YOUR PERSONAL CIRCUMSTANCES BEFORE MAKING IMPORTANT DECISIONS. NO PART OF THIS IS TO BE CONSTRUED AS SUCH.
2. THE ABOVE IS BASED ON OUR UNDERSTANDING OF CURRENT LEGISLATION / PROPOSALS AND IS A BROAD SUMMARY & CANNOT COVER ALL EVENTUALITIES.
3. TAX TREATMENT CAN CHANGE AND DEPENDS ON YOUR CIRCUMSTANCES.
4. SIGNIFICANT WITHDRAWALS FROM YOUR PENSION SAVINGS MAY SERIOUSLY ERODE YOUR STANDARD OF LIVING IN RETIREMENT.
5. THE ABOVE ASSUMES THE LIFETIME ALLOWANCE THRESHOLD IS NOT EXCEEDED WHERE RELEVANT.
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