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, although it may not be tax efficient to do so.
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. 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. It is important to remember that the amount of flexi-access fund withdrawn to provide you with an income will be taxed at your marginal rate of Income Tax. 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.
Income drawdown carries significant investment risk, as your future retirement income remains totally dependent on your pension fund performance. You should remember that if you access your tax-free cash early the benefits will be less than if you wait until your planned retirement age.
A new option, called the Uncrystallised Funds Pension Lump Sum (UFPLS),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 subject to tax. UFPLS is not available from any part of your pension that is already in drawdown.
Taking a UFPLS will trigger the restricted annual allowance – the Money Purchase Annual Allowance (MPPA) of £10,000.
If you are currently in capped drawdown, you will have a maximum level of income that you can take each year. This is reviewed every three years up until you are 75, and annually thereafter. As of 6 April 2015, you can either continue taking capped drawdown or take advantage of 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 important to remember that if you make the decision to move from capped drawdown to flexi-access drawdown, the amount you can contribute to your pension each year will change. The £10,000 annual allowance is triggered when you take your first income payment from the flexi-access drawdown arrangement. This will be reduced to £4,000 and governed from April 2017.
Anyone currently taking flexible drawdown should have been automatically moved into flexi-access drawdown on 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 up to the Money Purchase Annual Allowance (currently £10,000 a year).
You can nominate someone to receive your death benefits – be it your spouse, children, grandchildren or even someone unrelated to you. You can also leave some or your entire 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, they can take income as and when required or leave the funds invested.
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 beneficiary within two years, they will be paid tax-free. However, if the beneficiary decides to take the pension as a lump sum, it will need to be paid within the two year period to remain tax-free. If the beneficiary chooses to draw down the pension, it doesn’t need to be taken within the two years but the administrator of the pension must be notified of their intention to draw an income.
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 – typically at the beneficiary’s marginal rate of Income Tax. The only exception to this rule is if they choose the lump sum option, and this was paid before 6 April 2016 (in which case 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 by your beneficiary. It is possible to have unlimited successors meaning, in theory, that 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. For some people, this may still be the right choice as it provides a guarantee of an income for life.
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.
The value of your investments and any income from them can fall as well as rise and you may not get back the amount you originally invested.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.