Independence, Expertise, Excellence

Providing high quality Independent Financial Advice for over 50 years
Pension Flexibility - Take Advice

Pension Flexibility – April 2015

With effect from April 2015, new legislation came into force which radically re-shaped the UK pensions world. It introduced some highly complex changes about how people are allowed to take benefits from their pension funds, although the essentials are as follows: -

The Basics

Previously, the earliest age at which someone can start to draw benefits from a pension fund is 55. From April 2015, the age remains 55, increasing to age 57 in 2028.

Previously, the maximum amount that can be taken as a lump sum free of tax was 25% of the value of the fund. From April 2015, the maximum amount that may be taken as a lump sum free of tax remains 25% of the value of the fund.

Before April 2015, someone could take 25% of the fund and then choose to: -

  • Defer drawing any taxable pension income
  • Take a taxable pension income by purchasing an annuity
  • Take a taxable pension income by drawing it direct from the fund (there were limits as to the maximum pension that may be taken)
  • People who could demonstrate a certain minimum level of pension income may have been able to take out larger amounts

From April 2015, someone can take 25% of the fund and then choose to: -

  • Defer drawing any taxable pension income
  • Take a taxable pension income by purchasing an annuity
  • Take a taxable pension income by drawing it direct from the fund
  • (without limit as to the maximum pension that may be taken)
  • Or, withdraw ad hoc lump sums from their fund. However, on doing this, each payment will consist of a 25% tax free component with the balance subject to income tax.

The Mechanics

It is not just be a question of instructing the pension provider to ‘pay out the fund’. People may be restricted in their ambitions by the administrative limitations of the pension provider and the mechanics are likely to be complicated.

If someone wishes to only take out the 25% tax exempt portion and leave the remainder untouched, they may need to convert their pension fund to an ‘Income Drawdown’ fund. This will also be the case if someone wishes to take the 25% lump sum and then phase out the remaining 75% over a period of years, to minimise their tax liabilities.

The whole process is more complex for members of occupational pension schemes.

The Dangers

There are a number of dangers associated with the new legislation and it is important that these are appreciated before any action is taken: -

  1. On withdrawing the whole fund, income tax will be due on 75% of the value.

    For example, take someone age 56 on a salary of £30,000 per annum with a pension fund worth £80,000.

    • They would pay no tax on receiving 25% of the fund, i.e. £20,000
    • They would be taxed on the remaining £60,000
    • They would therefore pay income tax based on £90,000, i.e. £30,000 salary plus £60,000 from their pension fund

  2. With the exception of those who have a very small fund, it is likely that most people will have to pay higher rate tax on taking the total fund
  3. On taking the fund, there will be restrictions on making future pension contributions
  4. There may be implications on future employer contributions
  5. There will be no future pension fund growth
  6. People will no longer have a pension fund to provide an income in the future
  7. It is an irrevocable step
  8. The industry is sensitive to the possibilities of miss-selling scandals and it is likely that anyone taking this route may be asked to sign a declaration that they accept all the consequences; this will minimise the likelihood of making any future claim

Taking Advice

Anyone contemplating taking benefits under the new regime would do well to take advice. This is particularly important if someone intends minimising their tax liabilities by phasing out the 75% over a period of years, because this will entail the fund continuing to be invested.