Pension Freedoms

If you have an old defined benefit pension (sometimes called final salary pension or career average) scheme you will need to transfer to a new plan, 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.

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,
• me Additional Voluntary Contribution (AVC) schemes
• Free Standing AVCs (FSAVC)
• Occupational Money Purchase schemes

You could:

• 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.

In addition:

• 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.

• 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.

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 you and/or your employer are contributing to a money purchase arrangement, and you access income in addition to your tax-free cash 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.

Most Defined Benefit schemes 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.