You may be aware that the biggest changes to pensions in a generation are being introduced from 6th April 2015. Please bear in mind that the information below is based on our understanding of current and proposed legislation.
The new rules: Flexible Access from 6th April 2015 onwards
You will have new options, as to how you take money from your pension:
Lump Sum and Flexi Access Drawdown
You may take a tax-free lump sum of up to 25% of the value of your pension plan, and withdrawals of income from the balance, without limit. The income will be subject to income tax.
Lump Sum and Annuity
You may take a tax free lump sum of up to 25% of the value of your pension plan and then purchase an annuity with the balance. The annuity payments will be subject to income tax. There will be increased flexibility with annuities under the new regime, including those that can stop or reduce in future, or those with increased guarantees payable for a particular length of time.
Uncrystallised Funds Pension Lump Sum
You may take a lump sum or a series of payments from your plan, leaving any amount not withdrawn as uncrystallised funds. 25% of the lump sum paid to you will be tax-free and the balance will be subject to income tax.
At what age can I take advantage of the new flexible options?
The earliest you can access your benefits is age 55 (this age may rise in the future). You may be able to access your pension fund earlier if you are in ill health, or have a protected retirement age under old rules.
If I have started to take benefits from my pension, can I still make contributions to my plan?
Yes, with tax relief up until age 75, although you should be careful not to fall foul of the existing Tax Free Cash recycling rules.
Also note that anyone accessing their pension savings using a flexible option (starting to take income from Flexi Access Drawdown or Uncrystallised Funds Pension Lump Sum) will have a reduced Money Purchase Annual Allowance of £10,000 (which compares to the normal Annual Allowance of £40,000). Individuals subject to the reduced Money Purchase Annual Allowance will be unable to use Carry Forward of previous unused contribution allowances.
What about changes to Death Benefits?
For death benefits designated after 5th April 2015 (even if death occurred before this date), the options will be much more flexible, and in general the effect of tax will be greatly reduced compared with the position under the outgoing rules.
If death occurs before age 75, beneficiaries will have the options of:
- Lump Sum, tax free if paid within 2 years
- Income in the form of Flexi Access Drawdown, paid tax free
- Annuity Purchase, income will be tax free
If death occurs on or after age 75, beneficiaries will have the options of:
- Lump Sum, taxed at 45% in 2015/16 tax year, although the Government proposes that in future years the rate will be at the beneficiaries marginal rate of income tax
- Flexible Access Drawdown, income subject to beneficiaries marginal rate of income tax
- Annuity Purchase, income subject to beneficiaries marginal rate of income tax
It may be necessary to review any existing nomination of beneficiaries to ensure they reflect your wishes and the new options. A revised nomination form will be available on our website soon.
If I am retiring soon, or have already done so, what should I do in the light of these changes?
The new flexible options provide the ability to take higher withdrawals, increasing the risk that your pension fund income may be unsustainable, and may even run out. For the majority of people, their pension savings provide an income throughout retirement, which depending on a number of factors could extend for many years, if not decades. It is therefore imperative that you obtain advice from a Financial Planner if you are not sure what to do. The rules can be complex, and only Financial Planners such as Lifetime can help you decide what you should do.
What about my existing benefits?
If you have benefits already in a Capped Drawdown arrangement, this will continue under the old Capped Drawdown rules unless you either request a conversion to Flexi Access Drawdown arrangement, or ask for income to be paid at a level above the current Capped Drawdown limits. You can also continue to make additional designations to an existing Capped Drawdown, from uncrystallised funds under the same arrangement.
If you have a Flexible Drawdown arrangement (pre April 2015) then this will automatically become Flexi Access Drawdown on 6th April 2015.
Who should I speak to about this?
Only an authorised financial adviser can advise you what you should do, if you have one you should speak to them about this, if you don’t, and you need help, then contact Lifetime on 01226 208600 to speak with one of our Financial Planners.