Under current rules, you can't take any money from your pension until you reach the age of 55. Then, you can take a maximum of 25% of your pension as a tax-free lump sum, with any further withdrawals charged tax at your marginal rate. As a result, most people use the rest of their pension pot either to provide an income for life in the form of an annuity, or to invest the remainder and draw an income from it known as drawdown. The income drawn should be carefully managed within agreed government rates and with advice based on the clients tax position. However, this is a more flexible arrangement and will suit many.
However, this 'income drawdown' tactic has mainly been used by people with bigger pension pots in the past (or those who had the benefit of advice), so the vast majority of people have used their pension savings to buy an annuity. With annuity/ interest rates being as low as they have been this may not have been the best decision for many.
NEW RULES FROM APRIL 2015
People taking retirement will now have four options open to them:
1. In essence annuity options are the same as before for the majority and an annuity can be purchased on the open market. As always the benefits of Enhanced Annuities should be considered were appropriate. There are some changes to the rules surrounding Annuities, too in depth for this summary.
2. This will work in the same way as the current drawdown facility in that you can take a 25% tax free lump sum up front and then a taxable income (taxed at your marginal rate).
Existing capped drawdown clients can continue or move to flexi drawdown by drawing above the capped allowance. You should speak to your advisor regards the best option for you.
3. The government has confirmed that uncrystallised flexible lump sums (UFPLS) can be taken on an ad-hoc or regular basis. However each lump sum will include a 25 per cent tax-free portion with the remainder taxed at marginal rate.
4. An ‘authorised taxed lump sum’ of the whole pot. Well it might buy you a Lamborghini, but it won't provide the fuel for the rest of your retirement and probably not the most tax efficient way to take your pension.
INHERITANCE TAX PLANNING
The 55 per cent death charge is to be removed, with beneficiaries of those who die under the age of 75 paying no tax whatsoever.
Beneficiaries of those who die over 75 will pay no tax on the transfer and marginal rate on withdrawals or 45% on lump sums. Subsequent clarifications also confirmed this would apply to value-protected annuities and certain defined benefit scheme lump sums on death.
With most pensions being held in trust, the pension could be placed outside of your estate and pensions can become a major tax planning opportunity for some.
As always, give me a call for further details or advice.
Beyond the scope of this newsletter: There are additional rules surrounding UFPLS for tax free lump sums above £375k and amounts paid that exceed the current lifetime allowance of £1.25M. The government has also attempted to close the recycling loophole by reducing annual pension contribution allowance to £10kper annum once a pension is crystallised.
07580 099 079 or
0113 457 4791
Peter C Hart Dip PFS & Cert CII
Independent Financial Advisor
7 Feast Field,
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Life has so many surprises it's best to be prepared and have a partner you can count on. Please contact me to advise of your needs.
Yorkshire Wealth Management Ltd
which is authorised and regulated by the
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