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A PENSION IS A LONG TERM INVESTMENT THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.
TAX TREATMENT IS BASED ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN THE FUTURE
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM TAXATION, ARE SUBJECT TO CHANGE.
Thinking of Pension Drawdown, you will need qualified advice to proceed.
PENSION INCOME DRAWDOWN
Pension drawdown gives you flexible access to your pension from the age of 55(rising to 57 from 2028).
You decide how much income to take from it. You choose whether to take income monthly, annually, as one-off lump sums, or even not at all.
You can stop, start or vary income to suit your needs and yearly tax situation. You retain the option to get a guaranteed income at any time by purchasing an annuity with the remaining fund.
You can choose to convert your entire pension to drawdown all at once, or you can convert smaller segments as and when you need them. This is known as partial, or ‘phased’, drawdown.
Income drawdown can be a more flexible option than an annuity for those who are comfortable with the risks.
The fund remains invested and you stay in control of your investment choices, but crucially income is not secure and relies on investment performance.
Retirement income could rise but the fund could run out if investments don't perform as expected, or if you take too much income or capital.
Under the new pension rules money remaining in your pension can be passed on to your beneficiaries when you die.
Planning for your lifetime can present complications as this is an uncertain period of time. For this reason we recommend that you review your drawdown solutions at regular intervals.
TYPES OF DRAWDOWN
Drawdown – Flexi-access
All new income drawdown plans are flexi-access from April 2015.
Flexi-access drawdown is a way of accessing your pension savings flexibly whilst your pension fund remains invested, giving it the potential to keep on growing.
Some, or all, of the Pension Commencement Lump Sum (PCLS) can be taken along with additional capital withdrawals and/or income with no minimum or maximum limits, with the amounts over and above the PCLS taxed at your marginal rate of tax.
Where you have taken an income from a flexi access drawdown plan then you are deened to have flexibly accessed your pension, and this will reduce the amount that you can contribute towards your pension in future. However if you take tax free cash only (PCLS), then it may be possible to retain the scope to contribute at the current (higher) level.
Drawdown – Flexi-access Pension Commencement Lump Sum (PCLS) Only
Drawdown contracts can be used to access a tax free capital sum, where this is required.
You then keep the remainder of the pension fund invested in the drawdown plan, but there is no obligation to draw income directly from the fund immediately.
This can be left to grow with the tax advantages of pensions until such time as additional funds are required, although these will be taxable as ‘income’.
Accessing the PCLS only will not trigger a reduced annual contribution limit.
Drawdown – Phased retirement (no PCLS required)
‘Phased Retirement’ is a process of taking your pension fund in stages, rather than securing your retirement income all at once.
This method uses only a part of the accumulated pension fund each year, and in particular uses the tax-free cash amounts for income purposes.
This means that, particularly in the early years, it is possible to create a highly tax efficient income stream.
Think of it as lots of ‘mini-retirements’ spread out over a number of years.
At first your regular ‘income’ will consist of a tax-free cash sum and income from a segment of your Income Drawdown plan.
You'll continue to receive income from this original segment, but you also have the option to take another tax cash-free sum and set up further Income Drawdown plan in future years.
This strategy may be useful in keeping the level of income that is taxable below annual tax allowances or prevent additional tax being paid.
Drawdown – Existing Capped Drawdown contract
Where you have an existing Capped Drawdown contract, it may be beneficial to retain this in the future despite a maximum limit being placed on how much income that can be withdrawn each year.
After payment of any Pension Commencement Lump Sum (PCLS), the remaining assets provide an income determined by reference to Government Actuary's Department (GAD) tables.
The main benefit of retaining an existing Capped Drawdown contract is in respect of the ability to make ongoing pension contributions.
In these circumstances, the reduced ‘Money Purchase Annual Allowance’ does not apply and the full Pension Annual Allowance is available for ongoing contributions.
If the limits under capped drawdown are breached at any time, the contract is automatically converted to a Flexi-access drawdown contract.
Uncrystallised Funds Pension Lump Sum (UFPLS)
From April 2015 an Uncrystallised Funds Pension Lump Sum (UFPLS) can be taken from pension funds.
Unlike existing Capped Drawdown and new Flexi-access drawdown, each lump sum is drawn directly from ‘un-crystallised’ money purchase pensions.
It’s possible to take a series of UFPLSs, each of which will be treated as a mix of 25% tax free cash and 75% taxable funds.
Unlike Flexi-access drawdown, it isn’t possible to take the tax free cash without receiving taxable income as you cannot have a PCLS in connection with an UFPLS.
TAXATION OF PENSION DRAWDOWN
Pension Commencement Lump Sum: Where a Pension Commencement Lump Sum (PCLS) is taken as part of any drawdown arrangement, this will be paid tax free.
Pension income: Any regular or lump sum withdrawals from pension contracts that are not Pension Commencement Lump Sums are classed as ‘income’ for taxation purposes.
If you are a non-tax payer you can reclaim the overpaid tax.
Uncrystallised Funds Pension Lump Sum - Each payment of an Uncrystallised Funds Pension Lump Sum (UFPLS) will be treated as a mix of 25% tax free cash and 75% taxable funds.
Tax rates may change in the future. If you are a taxpayer and tax rates go up, the income you receive after tax is deducted will be smaller.
Contact Chris Johnson DipFA or Ed Randall for further details on 01642659500