Full Pension Access
The biggest change that was announced in the budget was that from April 2015 it will be possible to take pension benefits from personal pensions without buying an annuity. In a nutshell you will be able to withdraw what you like from a personal pension.
It cannot happen until 2015, unless you qualify for "flexible drawdown"; for flexible drawdown the basic rule is that you need £12,000 of pension income – see flexible drawdown for more details, and other rules.
Even if you don’t qualify for flexible drawdown, there may be some reasons not to delay taking pension benefits even if you want to take all your pension fund without buying an annuity. Effectively, you can start the process now, with a view to completing it in 2015, and there might be some tax advantages.
e.g. So from April 2015 if you have a pension fund of £50,000 you can take £12,500 as a tax-free lump sum, and the remaining £37,500 as a taxable payment.
Suppose you have earned income of £20,000 already, then this would put around £20,000 of the pension into the 20% tax bracket, which would mean £4,000 of tax, and the remaining £17,000 into the 40% bracket, meaning tax on this element of (losing £6,800 of the £17,000 in tax). In this example, you would lose £10,800 in tax on the £37,000 that would be taxable.
You could however start to take benefits now, and aim to stagger them. You could enter into an income drawdown contract now. This would allow you to take 25% as a tax-free lump sum. You could also then take no income, or an additional withdrawal of about 8% of the remaining fund (for a 65 year old male as at March 2014). You could then wait until April 2015 to take the remaining money.
So, in a nutshell you can take a lump sum now, about another 8%, and then the rest from April 2015 (but there may be some tax advantages to withdrawing the money over a number of years – see below).
Tax planning under the new rules
The new rules will allow people to take their pension all in one go, which can be expensive in terms of tax.
It may make sense to stagger taking benefits.
E.g Mr Smith has a pension of £80,000. He is aged 60. He takes £20,000 as a tax-free lump sum, and then the remaining £60,000 as a one off payment. He earns around £10,000 per year (enough to use all of his personal allowance).
He receives (approximate figures)
£30,000 minus tax at 20% = £24,000
£30,000 minus tax at 40% = £18,000
So of his £80,000 he ends up with £62,000, because all of the second £30,000 falls into the 40% tax bracket, so he loses £12,000 on this element.
Mr Brown’s circumstances are the same as Mr Smith’s, but he is a little more patient, and he takes his tax-free cash £20,000. He decides not to take any income. Two years later he stops work, and his income of £10,000 stops. He still has £60,000 in his pension, and he decides to take £15,000 for four years.
He receives (approximate figures)
£10,000 each year is tax-free = £10,000
£5,000 minus tax at 20% = £4,000
He repeats this process for four years, and therefore gets £56,000.
In total he therefore gets £76,000
So you can begin to take benefits now, be it just a lump sum of 25% or the extra 8% or so which would be taxable, and then complete the process in the future.
If you have a question about your pension in more detail and how it can benefit you now, then Contact us online or phone 0800 011 2713.
If you can't find the information you're looking for on the website, or you want to know more or have a question, or just want to chat through some details about your pension then please feel free to contact us, without obligation. Either contact us online or call 0800 011 2713.