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Summary of the 2015 Pension Flexibility - Published 5th May 2015

In the 2014 Budget, the Chancellor announced that with effect from 6 April 2015 if you have reached the minimum pension age (currently 55) you will be able to draw as much or as little as you want from your pension funds, with the then restrictions imposed by legislation ceasing to apply.

From 6 April 2015, two new ways to receive pension payments, detailed below, have become available to those who have reached age 55, provided your pension scheme’s rules permit them.

Flexi-Access Drawdown

• A lump sum, normally 25% of the fund, is paid tax free, and the remaining 75% of the fund is allocated to a Flexi-Access Drawdown arrangement.
• You can draw as much or as little of the fund in the Flexi-Access Drawdown arrangement as you like, with any residual fund remaining invested.
• The amount drawn from the Flexi-Access Drawdown arrangement will be taxed as income at your marginal rate of income tax.
• At the point income is first taken from the Flexi-Access Drawdown arrangement a new Money Purchase Annual Allowance (see page 3 for details) will apply, limiting tax relievable pension contributions to £10,000 per year.
• Funds held in the Flexi-Access Drawdown arrangement at your date of death can be paid to your beneficiaries, as a lump sum or as income, tax free if you die under age 75 on at their marginal rate of tax thereafter.

Uncrystallised Funds Pension Lump Sum (UFPLS)

• An Uncrystallised Funds Pension Lump Sum will provide a one-off payment of all of the fund chosen to be paid as an Uncrystallised Funds Pension Lump Sum.
• 25% of this payment will be made tax-free with the remaining 75% taxed as income at your marginal rate of income tax.
• At the point an UFPLS payment is made a new lower Annual Allowance will apply limiting contributions to pension schemes to £10,000 per year.


New Options in More Detail

Flexi-Access Drawdown

This is simply a pension fund with the option to draw as much or as little as you want, whenever you want. If you have funds in Flexi-Access Drawdown you can elect to take no pension payments at all, regular payments or to take your entire fund in one payment. The only limit is the size of the fund available.

When funds are first designated for payment of Flexi-Access Drawdown, a lump sum of 25% of the fund can be paid tax-free (this percentage can alter is you have a protected lump sum). All other payments are taxed as income so taking significant sums could result in you being pushed into a higher tax bracket, and paying more tax than expected.

If you are already receiving income drawdown from your pension fund in the form of Capped Drawdown you can elect to convert to Flexi-Access Drawdown any time and the existing upper limit on pension payments will cease to apply. Additionally, if you opted for Flexible Drawdown prior to 6 April 2015 you have automatically been switched into Flexi-Access Drawdown on that date. In these circumstances a second tax-free lump sum would not be payable, and you will need to be aware that switching into Flexi-Access Drawdown and taking income will trigger the Money Purchase Annual Allowance, detailed below.

Uncrystallised Funds Pension Lump Sum

If you have reached the minimum pension age of 55 you can take lump sums from your uncrystallised funds as an Uncrystallised Funds Pension Lump Sum. There is no limit on the number of such lump sums that can be paid, other than until the fund has been exhausted or your Lifetime Allowance has been used up.

25% of any funds paid as an Uncrystallised Funds Pension Lump Sum will be tax-free, with the remaining 75% being taxed as income at your marginal rate. Because this split between the tax –free and taxed elements is fixed, it does mean that an Uncrystallised Funds Pension Lump Sum cannot be paid if you have a right to receive a lump sum which is greater or less than 25%; for example if you have a protected lump sum, or if you have received a Pension Credit (i.e. a share of an ex-spouse’s pension on divorce) from funds which have already paid a pension commencement lump sum.

Receipt of an Uncrystallised Funds Pension Lump Sum will make you subject to the Money Purchase Annual Allowance Test, detailed below.


The Money Purchase Annual Allowance Test

A new limit is being introduced to restrict the amount that can be contributed to pension schemes for anyone who has already started drawing income through Flexi-Access Drawdown, or who has received an Uncrystallised Pension Lump Sum.

Any contributions paid by, or on behalf of, such a person into any money purchase pension scheme will be tested against a reduced annual allowance of £10,000 (the full annual allowance is currently £40,000). Contributions exceeding this limit will result in an annual allowance tax charge being levied on you.

If you receive pension income from an Annuity, a Scheme Pension or from pre- 6 April 2015 Capped Drawdown which you elect not to convert into Flexi-Access Drawdown, you are not subject to the Money Purchase Annual Allowance and could, if desired, continue to contribute up to the full annual allowance each year without incurring any Annual Allowance tax charges.

Existing Capped Drawdown Arrangements

Under the existing legislation you can take an income using Capped Drawdown and draw a variable amount up to a maximum each year. The maximum depends on your fund size, age and factors given by the Government Actuary’s Department (‘GAD rate’). The GAD rate gives an estimate of the rate at which you could take a level income from your pension fund each year for the remainder of your life. Under Capped Drawdown you have the flexibility to take up to 150% of the pension based on the GAD rate each year.

Capped Drawdown places a limit on the pension that can be paid in a year (‘reference year’). Every third reference year (annually after age 75), your fund value is calculated and the maximum drawdown pension is reassessed.

With effect from 6 April 2015, it is no longer possible to create a Capped Drawdown arrangement, although it will be possible to add more funds to an existing one. What this means is that if you are already in Capped Drawdown you can continue to draw pension as Capped Drawdown, subject to all the limits and reviews above, and if you also have any uncrystallised funds, these can also be used to provide additional Capped Drawdown income if desired.

If you are in receipt of Capped Drawdown you can opt for further flexibility through choosing to convert your income into Flexi-Access Drawdown. Additionally, if you take Capped Drawdown in excess of the 150% GAD limit in any year you will be deemed to have automatically converted your pension to Flexi-Access Drawdown.

Receipt of a Capped Drawdown income will not trigger the Money Purchase Annual Allowance, so this may be a preferable option if you wish to continue funding your pension scheme with substantial contributions.

Pension Death Benefits

If you die aged under 75 your pension fund can be paid to your nominated beneficiary either as a lump sum or as an income with no tax liability whatsoever. This represents a major improvement on the previous regime.

If you die aged 75 or over, again, you can leave your entire pension fund to any nominated beneficiary but withdrawals as a lump sum or income will be subject to income tax at their marginal rate (until 5 April 2016 lump sums will be taxed at 45%).

If you have not yet nominated a beneficiary or if your previous nomination is out of date you should contact Finesco to update this as soon as possible.

Conclusion

The post 2015 pension regime is clearly better for those considering drawing their pension benefits.

It provides much more flexibility and control over how you can access your pension income and lump sums. However, with this freedom to choose comes responsibility and caution. Because you can withdraw it all it does not mean that it is advisable to do so, particularly with the income tax considerations.

These relaxations emphasise the importance of receiving financial advice on how you can best take advantage of this much improved pension landscape.





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