Your Retirement Options and Pensions Freedom
Please note that whilst every effort is made to ensure that the information contained within this explanation is correct, these notes are by necessity brief and of a generalised nature. We would provide specific personalised advice prior to finalising any arrangement.
On 6 April 2015 new pension rules came into force, giving you much greater flexibility over how you use your pension savings and the options you have in retirement.
These changes include the freedom to access the whole of your pension fund, more choice over how to receive the tax-free cash from your fund, changes to death benefits and changes to the contributions you can make.
Whether you have a personal pension, a group personal pension or a stakeholder pension these new rules are far-reaching, and they could have significant tax implications. It is therefore important to take advice on the various options open to you.
The first of the new options is “flexi-access drawdown” which in essence places no limit on the amount of income you can take from your pension fund, this means that it would be possible to take the whole of your pension fund in one go, however it may not be tax efficient to do so.
If you will be dependent on your pension to support you through your lifetime you may need to consider taking a lower level of income to sustain you.
You will be able to take 25% of your fund as a tax free lump sum if you have not previously used that fund for drawdown purposes with the remainder of the fund staying in your pension to provide you with an income.
It is important to remember that the amount of flexi-access fund withdrawn to provide you with an income will be taxed at your marginal rate of income tax therefore if you take too much income this may move you into the next tax bracket and result in you paying a higher rate of tax.
Pension Lump Sum
A new option has been introduced by the Government which is called the Uncrystallised Funds Pension Lump Sum (UFPLS).
This option is for funds not already in drawdown and allows you to take a one-off payment from your pension or a series of lump sums leaving the remainder of the fund in your pension invested, the first 25% of each UFPLS is tax free, with the balance being subject to tax.
UFPLS is not available from any part of your pension that is already in drawdown.
You can take 25% tax free, this is referred to as Pension Commencement Lump Sum – (PCLS) you will pay tax at your marginal rate of tax on the rest of the money
How can I access the new pensions options?
For anyone who was in drawdown as of 6 April 2015 ( capped or flexible) the new options differ depending on which one you currently have.
Currently if you are in capped drawdown you will have a maximum level of income that you can take each year and this reviewed every three years up until you are 75 and annually thereafter.
From 6 April 2015 you are able to continue to take capped drawdown or you will also have the option to switch to the new flexi-access drawdown whereby the amount of income you can take will be unlimited and there will be no further maximum income level reviews.
It is also important to remember that if you take the decision to move from capped drawdown to flexi-access drawdown that the amount you can contribute to your pension each year will change.
Anyone who is currently taking flexible drawdown should automatically be moved into flexi-access drawdown from 6 April 2015. This will have no effect on how you take benefits but will enable you to make tax-relieved contributions to your pension.
New Death Benefit Rules
You can nominate whoever you choose to receive your death benefits, this can be your spouse, children, grandchildren or even someone unrelated to you, you can also leave some or all of your pension fund to charity.
The beneficiaries of your pension fund can elect to take the fund as a lump sum or leave the fund invested and take an income under the new flexi-access drawdown rules. If they do choose the flexi-access option then they can take income as and when required or leave the funds invested thereby benefitting in the tax advantaged pension.
What about tax on the death benefits?
The tax treatment of your death benefits will depend on two things.
- Your age when you die.
- Whether or not the funds are designated to your beneficiary within two years.
If you die before your 75th birthday and your pension funds have been designated to your beneficiaries within two years they will be paid tax-free, they do not however need to take the money out within the two year period.
If you live beyond your 75th birthday or if you die earlier but your pension funds are not designated within the two year period, then the death benefits will be taxed; the taxation that would normally be applied would be at the beneficiaries marginal rate of income tax. The only exception to this rule is that if they choose the lump sum option and this is paid before 6 April 2017 then it will be taxed at 45%.
If your beneficiary has not withdrawn the whole of the pension fund before their subsequent death then the pension funds can be passed on again so your beneficiary will be able to nominate anyone they want the funds to go to following their death.
It is possible to have unlimited successors so in essence your pension fund could be passed on for generations if it is not all withdrawn.
You will of course still have the option of purchasing an annuity which for some people may still be the right choice to give a guarantee of an income for life paying a level income or increasing over time.
From 6 April 2015 new flexible annuities also became available which will allow the income level to decrease as well as increase providing this is stated in the annuity when the contract is started.
The new rules are far reaching and far more flexible therefore we would be more than happy to discuss these options with you in more detail so please contact us to arrange a meeting.
The value of your investment can fall as well as rise, and you may not get back all of your original investment.
A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.