Pension Changes 2015
Flexible pension access is now with us. The government’s plan to allow investors to access the retirement funds they have spent years building, long before they plan to retire, came into being in April this year.
The hype was already big, but it continues to grow as more and more people want to know just what their options are.
But is accessing your retirement fund early right for you?
This is the $64 million dollar question. And there is no simple answer.
The decision must be made on a personal basis. Just because access is right for one person, does not mean it is right for you. You should carefully consider all of your options and talk things through with a professional, regulated and independent financial adviser.
But what are the changes, and how will it work?
Access your savings
From 6 April 2015, from age 55, you can access as much of your savings from your defined contributions pension scheme (also known as ‘money purchase schemes’) as you want under new ‘pensions flexibility’ rules.
Schemes don’t have to offer these options. Talk to your pension provider to see what options are available to you.
You can transfer your pension savings to a pension provider that offers the option that you want to use.
You can access your benefits in a number of different ways:
Lump sum payment
You can take money direct from your pension pot without having to buy an annuity or put the money into drawdown, and 25% of this sum will be tax free. This is called an ‘uncrystallised funds pension lump sum’ (UFPLS). You can take one or more UFPLS payments and these can be regular or irregular payments.
If you receive a UFPLS and this is the first time you have used the pension flexibility rules to access your pension savings, your scheme administrator will provide you with a flexible access statement.
You need to keep in mind that there may be a tax liability on the withdrawals taken, and you should carefully consider your personal circumstances prior to making a decision.
You can use some or all of your funds to buy an annuity that will be payable at least for the rest of your life.
You can take a tax free lump sum of up to 25% of your pension pot when you buy an annuity. This is called a pension commencement lump sum.
You can put funds into drawdown. From 6 April 2015 there are no limits on how much or how little you can take from your drawdown fund each year. You can take a tax free pension commencement lump sum of up to 25% of your pension pot when you put funds into drawdown. Any drawdown payments are taxed as income.
If you receive a flexi-access drawdown payment and this is the first time you have used the pension flexibility rules to access your pension savings, your scheme administrator will provide you with a flexible access statement.
You can continue in capped drawdown if you were in a scheme before the changes, but no new capped drawdown funds or flexible drawdown funds may be set up from 6 April 2015 onwards.
If you are in capped drawdown you may either convert your fund into a flexi-access drawdown fund or continue to take a capped drawdown pension from your arrangement. Speak to your pension scheme administrator if you want to convert to flexi-access drawdown.
You can add additional funds to your existing capped drawdown arrangements and your existing annual pension limits and review periods for capped drawdown will continue to apply. Capped drawdown payments are taxed as income.
Short term annuities
If you are in drawdown you can decide to receive benefits in drawdown by purchasing short term annuities. These are paid by insurance companies at least annually and for no more than 5 years.
Tax on payments and contributions
All payments you receive from an annuity or drawdown are taxable as income. You also pay income tax on 75% of the amount of any UFPLS you receive. The amount of tax you pay will depend on the amount of payments that you receive in the tax year plus any other taxable income you have.
You’ll also pay tax on any contributions you make to your pension pot over your tax-free annual allowance.
If you would like to discuss your own personal circumstances, arrange a meeting with one of our independent financial advisers.