Get free updates - subscribe to our monthly newsletter Subscribe
6 April 2015 sees the introduction of some radical to changes to pensions that will provide all UK individuals with much greater flexibility when accessing their pension savings from the age of 55. Whilst this is positive news for most, the vast array of options and possible tax implications also demonstrate additional complications and seeking professional advice is key to avoiding some of the pitfalls.
For all money purchase scheme arrangements, pensions can be paid via any of the following methods:
Capped drawdown – HMRC rules limit the amount of income that may be withdrawn from the arrangement. The current limit is 150% of the value of an equivalent annuity, as set by Government Actuary Department tables. Withdrawals are taxed as PAYE pension income.
Flexible drawdown – There is no limit on the amount that can be taken each year as drawdown pension.
Some scenarios may permit the entire pension fund to be paid as a lump sum payment instead of one of the pension options listed above.
Trivial Commutation – those aged 60 with pension rights under all registered pension schemes of no more than £30,000 can take this as a lump sum payment. 25% of this is tax free, the remainder is subject to tax at the individual’s marginal rate.
Small pots – Regulations allow for up to three small pension funds of £10,000 or less to be paid out as a lump sum. Again, 25% of the total is tax free, the remainder being subject to Income Tax as above.
Choosing the right vehicle will depend upon your personal circumstances and views. The size of your fund, your income requirements, your age, your health and your willingness to take investment risk are all important considerations. Professional advice is often essential to cover all the options and to find out which is best for you as all solutions can impact upon the amount being taken and how long it can be sustained for.
Flexi-access drawdown funds (FAD) – new plans first created on or after 6 April 2015. There are no restrictions on the withdrawals that can be made. Existing capped drawdown arrangements can remain under current rules and restrictions, or be converted to FAD. Existing flexible drawdown contracts will automatically become flexi-access drawdown funds.
Uncrystallised Funds Pension Lump Sum (UFPLS) – this enables people to fully access their pension funds that haven’t yet been brought into payment. 75% of each payment will be taxable as pension income at the individual’s marginal rate of income tax, with the remaining 25% will be tax free.
Money Purchase Annual Allowance (MPAA) – all individuals accessing their pension savings via the new flexible methods of FAD, UFPLS or an annuity will receive a new £10,000 annual allowance for money purchase pension savings. Annual contributions up to this amount will still be permitted, but there will be no ability to carry forward any unused annual allowance from previous tax years.
Changes are also being made to the treatment of benefits on the death of the member. Where death occurs before age 75, any payments of income withdrawal to the beneficiary or successor can be made tax-free, providing the funds are designated within a two-year period. If this is not made within two years, or if the member reaches age 75 at the time of their death, all payments of drawdown pension will be subject to the recipient’s marginal income tax rate.
Similar changes are also being made in respect of annuities, so that pension death benefits in the form of an annuity can be paid to anyone, not just a dependant, and payments from the annuity can be made tax free where the member died before age 75.
Despite many predicting their demise, a lifetime annuity still remains an option at retirement for many, especially those wishing to secure a guaranteed lifetime income, but instead the guaranteed period will not be restricted to 10 years and the payments can reduced, whereas at present they are fixed.
Channel 4’s Dispatches programme ‘How to Blow your Pension’, screened on Monday 12 January, highlighted the importance of seeking financial advice from a regulated adviser and that without careful planning some people could find themselves in great financial difficulty later in life. An independent financial adviser can examine the whole market and help you source the most suitable solution based upon your individual circumstances. Speak to us about your plans.
If you like this article and would like our FREE updates sent straight to your inbox then subscribe to our monthly newsletterSubscribe
All content © 2015 Armstrong Watson. All Rights Reserved. Website by Simon Pighills.
Armstrong Watson LLP is a limited liability partnership registered in England and Wales, number OC415608. The registered office is 15 Victoria Place, Carlisle, CA1 1EW where a list of members is kept. Armstrong Watson LLP is regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. Unless otherwise indicated, either expressly or by the context, we use the word “partner” to describe a member of Armstrong Watson LLP or an employee of Armstrong Watson LLP in their capacity as such.
Armstrong Watson Audit Limited is registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales. Registered as a limited company in England and Wales, number 8800970. The registered office is 15 Victoria Place, Carlisle, CA1 1EW.
Armstrong Watson Financial Planning Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 542122. Registered as a limited company in England and Wales, number 7208672. The registered office is 15 Victoria Place, Carlisle, CA1 1EW. Armstrong Watson Financial Planning & Wealth Management is a trading style of Armstrong Watson Financial Planning Limited.
Armstrong Watson Trustees Limited is a limited company registered in England and Wales, number 84495656. The registered office is 15 Victoria Place, Carlisle, CA1 1EW.