A new era of greater flexibility and choices
From 6th April 2015 the most wide sweeping reforms to pensions came into force. To take advantage of these reforms you must be aged 55 or more. (Please note these points do not apply to the State Pension).
The new rules bring in a new era of Pension Freedom, introducing far greater flexibility and now allows individuals to release their entire fund as a single cash payment; you are no longer forced to use part of your pension fund to provide income.
So what can you do and what happens?
Click on one of the titles below for more information.
What is flexible access?
If you have a Defined Contribution pension, sometimes called Money Purchase, then you have total freedom as to how you take your benefits.
These pensions include Personal Pensions, Group Personal Pensions, Stakeholder Pensions, Section 32 Buyout Plans, Self-Invested Personal Pensions (SIPP), Retirement Annuities, some Additional Voluntary Contribution (AVC) schemes including Free Standing AVCs (FSAVC) and Occupational Money Purchase schemes.
- Take it all as a cash lump sum. 25% would be tax free but the rest taxed as income. (This is called an Uncrystallised Funds Pension Lump Sum or UFPLS).
- Take smaller lump sums as and when you like. 25% of each lump sum would be tax free and the balance taxed as income, if your scheme allows this. (This is utilising UFPLS).
- Take 25% tax free (or part of it) and leave the rest invested to take at a future date (via Flexi-access Drawdown). Any income taken in excess of the 25% tax free part would be subject to income tax.
- Take 25% tax free and purchase a pension annuity with the balance. The annuity would be subject to income tax and provides a secure income for the rest of your lifetime.
- Some old arrangements offer valuable guaranteed benefits that you may lose by exercising any of the above options. This could cost you a lot of money in the long run. You are required, by law, to get advice regarding these guarantees and this is where we can help you.
- Every person with a defined contribution pension has the right to free and impartial guidance on their options as they approach retirement (known as the guidance guarantee). This is provided through the Pension Wise website and can be done face to face, online or by telephone.
- Not all older pensions will provide all these options, we can find out which options are available to you. Just complete the Get Started Form.
But you should be aware that:
- Some older existing pensions may only offer limited options. Please contact us, using the Get Started form as we may be able to help. It’s free to find out your options with no obligation.
- Any withdrawals in excess of the tax free cash sum will be taxed at your marginal rate of tax depending upon your individual circumstances and may be subject to change in the future.
- If you take the whole of your pension as a cash lump sum you will not have any capital left to provide retirement income.
How much tax must I pay?
You can take up to 25% of the value completely tax free.
- After taking your 25% tax free cash any capital withdrawals or income are taxed at your marginal rate of tax depending upon your individual circumstances and may be subject to change in the future.
- If you are receiving any state means tested benefits then these may be affected by the receipt of tax free cash and/or taxable lump sums or income.
I’m still paying into other pension arrangements
The maximum you are allowed to contribute to pension schemes each year is £40,000. This is called the Money Purchase Annual Allowance (MPAA).
- If your employer and/or you are contributing to a money purchase arrangement then the MPAA is reduced from £40,000 to £4,000.
- If you are only contributing to a Defined Benefit Pension Scheme (see below) then the above reduction doesn’t apply.
- You must notify any scheme you are contributing to, within 91 days, that you have flexibly accessed pension benefits or face a fine of £300.
- If your pension is worth £10,000 or less you can take it as a small pension pot (you are allowed three of these) without reducing your Money Purchase Pension Allowance.
- If you were already in a capped drawdown pension before April 2015 and any withdrawals remain below the cap then your MPAA is not affected.
- If you take your pension as a lifetime annuity then your MPAA is also not affected.
What about Defined Benefit Pension Schemes?
If you have benefits in an old Defined Benefit (sometimes called Final Salary or Career Average) scheme you will need to transfer to a new contract, such as Flexible-access Drawdown, to take advantage of the above pension freedoms.
These schemes include the Local Government Pension Scheme and Universities Superannuation Scheme, but NOT the NHS, Teachers’, Civil Service, Armed Forces or emergency services schemes.
- You will need to provide your old scheme with proof that you have received advice from an FCA regulated adviser not connected with the pension scheme, such as ourselves, before the transfer can take place. This is because you will be losing very valuable benefits. We can help. Just complete the Get Started form and send it to us so we can contact your scheme to obtain the details that we need to advise you.
- You should bear in mind that you would be giving up virtually guaranteed benefits and that you would be taking all the investment risk once transferred. In addition, it would almost certainly reduce your retirement income.
- If you have old Public Service pensions, other than the Local Government Pension Scheme and Universities Superannuation Scheme, then you are not able to transfer and can only receive your benefits direct from the scheme in accordance with their rules.
- There is an exception to the above and that is where your pension pot, excluding the State Pension, is less than £30,000 then you should be able to take it all as a cash sum in the same way as the first bullet point in Flexible Access above, but you will need to check with your scheme first.
And Death Benefits?
Most Defined Benefit and many Occupational Money Purchase schemes pay benefits to only a spouse or dependant, which you may or may not require. This is normally part of the annual pension income that would have been paid to you
A lump sum may also be payable, although again this can be limited; typically either a return of contributions (in the case of a contributory scheme) with or without interest, or the equivalent to the tax free cash entitlement at the time that you died.
A Personal Pension allows the whole fund to be paid, often completely tax free and outside of the estate for Inheritance Tax purposes. In later years, beyond age 75, when tax does become an issue, the fund can be split amongst multiple beneficiaries to spread any potential tax liability.
In addition, you can nominate any person or group of people to receive the death benefit. This can include children, grandchildren etc., or even charitable organisations, with the option to split the fund between multiple recipients. For some people this option could be very attractive compared to the rigid and limiting occupational scheme rules.
Pension Freedom Warning
Those taking 100% of their pension pot as a lump sum could see a significant tax bill of potentially up to 45%, or those on ‘means tested’ state benefits could lose them entirely.
Although you can release up to 25% of your pension pot tax free, all of the balance is taxed at your marginal rate depending on your individual circumstances and may be subject to change in the future.
While it is possible to take cash from your pension from age 55, it must be made very clear that taking any pension benefit early is only suitable for a limited number of people and circumstances.
It should not be seen as an easy way of raising cash and it is likely to result in a reduction of what you would have otherwise got in retirement. In addition:
- You will need to plan for any future changes to UK tax and benefit rules and your circumstances.
- Defined Benefit schemes have extremely valuable benefits that would be lost if you transferred out into a Personal Pension to take advantage of the new Pension Freedom rules.
- Taking your entire pension pot as cash may not be the most suitable option for you, particularly if you are likely to be dependent on the income it would have generated in retirement.
- Once you have used up your entire pension fund there will be nothing left to provide for you in retirement.
It is vital that you get professional advice
The government have committed themselves to the notion that everyone who is considering taking advantage of the new Pension Freedoms should be able to get free guidance; the problem is it is just that, guidance. They are also saying that you should get qualified professional advice before making any decisions that could affect the rest of your life.
Grove are Professional Financial Advisers specialising in Pension Transfers. We have years of experience and have already advised thousands of people. We will tell you whether releasing your pension early is the right thing for you to do and how to minimise, or even eradicate any tax charge or effect on State Benefits. It costs nothing to find out your options.
Why should I speak to Grove for Pension Release and Pension Transfer advice?
Grove Pension Solutions Ltd is regulated by the Financial Conduct Authority.
We were established in 2007 so have many years of experience successfully helping 1000’s of individuals. Some of them we advised to transfer their pensions and some of them we advised to leave their pensions where they are and not transfer them.