+44 (0)20 7389 8133 Make an Enquiry
News / Pension Lump Sums ? A New Second Option

Pension Lump Sums ? A New Second Option

04.09.14

Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

HMRC has published its draft Taxation of Pensions Bill, covering the new pension freedom to apply from 6th April 2015.  It includes the opportunity to take lump sums from uncrystallised funds.

HM Revenue & Customs (HMRC) published its draft Taxation of Pensions Bill on 6th August 2014, covering the new pension freedom that comes into effect on 6th April 2015.

Pension scheme members aged over 55 taking benefits for the first time will have four options from April:

  1. Flexi-access drawdown. This new form of income drawdown has no upper limit on how much members can take.
  2. Uncrystallised funds pension lump sum (UFPLS). This allows members to take a lump sum, or a series of lump sums, from uncrystallised pension funds.
  3. Lifetime annuity.
  4. Scheme pension.

The uncrystallised fund pension lump sum is a new addition to the “pensions freedom” reforms. “Uncrystallised” means that no pension benefits, whether in the form of a lump sum or income, have been drawn yet from the pension plan. Normally, when you take a pension commencement lump sum (“tax free cash”), you have six months to decide how to use the balance of the fund (drawdown or annuity), otherwise the sum becomes taxable. With this new UFPLS, this requirement to make a decision within six months is removed.

This new type of lump sum could therefore be an interesting option for individuals to consider, depending on their circumstances and objectives.

There are however two key points to consider:

Only 25% of the withdrawal will normally be tax free. The remaining 75% will be taxed at the individual’s marginal rate of income tax. Those using UFPLS will not be able to access their tax free cash and leave the rest of their pension invested; each withdrawal will be treated as 25% tax free cash and 75% taxable income. Therefore individuals who take an ad hoc lump sum without moving into drawdown or buying an annuity could end up paying more tax than expected.

Also, when an UFPLS is taken, the individual’s annual allowance for ongoing contributions is reduced from £40,000 to £10,000.

These tax rates are as applied under the UK taxation. Non-UK residents also have to consider the tax rules in their country of residence. Specialist advice is needed to ensure there are no unexpected tax consequences.

Note also that accessing funds through UFPLS is not yet regulated by the Financial Conduct Authority (FCA) or Pensions Regulator. This leaves anyone who takes this option unprotected. There is a risk that individuals could deplete their pension pots without realising it. This is in contrast to the income drawdown process where the FCA has established strict rules on providing advice to ensure everyone understands the risks.

You should ensure that your pension adviser is authorised by the FCA, even if you live overseas.

Temporary rules for pension commencement lump sums

With the full “pensions freedom” not starting until April 2015, temporary rules have been introduced so that money purchase scheme members can take their tax free lump sum now and defer the associated pension until after April.

In other words, the six month period mentioned above will not start until 6th April 2015, so the associated pension can be deferred to 5th October. This rule came into effect after the Budget on 19th March, but also affects those who took a lump sum from 19th September 2013 onwards if they had not become entitled to their pension.

This temporary measure enables members to wait to take their pension under the flexible rules starting in April – if their pension scheme allows this.

The deferred scheme is considered uncrystallised, so if the individual dies between taking the lump sum and taking the pension, the balance of the fund can be paid out as an uncrystallised lump sum death benefit. However if the 5th October deadline passes and the pension is still not in payment, the lump sum paid can no longer be considered a pension commencement lump sum and will be subject to tax charges.

The pension reforms are welcome for UK residents and expatriates alike, but it is essential to understand the short and long-term implications of the new options, both from a tax point of view and your long-term financial security, so that you can determine what the best route is for you. Seek specialist and regulated advice.

3rd September 2014

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
Make an Enquiry

We want people to be able to easily access and understand the information we provide, so if you need further help to access information on this website or key documents in a different format or setting, please contact us via your Blevins Franks adviser, by email via [email protected] or by phone on +44 (0)20 7389 8133.

 

Blevins Franks Financial Management Limited (BFFM) is authorised and regulated by the Financial Conduct Authority in the UK, reference number 179731, to provide advice in the UK. Blevins Franks Wealth Management Limited (BFWML) is authorised and regulated by the Malta Financial Services Authority, registered number C 92917 to provide advice in Malta and other EU countries in line with its [IDD and MiFID] passporting permissions. It is authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks Trustees Limited (BFTL) is authorised and regulated by the Malta Financial Services Authority for the administration of trusts, retirement schemes and companies. Blevins Franks France SASU (BFF), is registered with ORIAS, registered number 07 027 475 to provide advice in France and other EU countries in line with its [IDD] passporting permissions, and authorised as ‘Conseil en Investissements Financiers’ and ‘Courtiers d’Assurance’ (register can be consulted on  www.orias.fr). Member of ANACOFI-CIF. BFF’s registered office: 1 rue Pablo Neruda, 33140 Villenave d’Ornon – RCS BX 498 800 465 APE 6622Z. Garantie Financière et Assurance de Responsabilité Civile Professionnelle conformes aux articles L 541-3 du Code Monétaire et Financier and L512-6 and 512-7 du Code des Assurances (assureur MMA). BFFM, BFWML, BFF and BFTL are all part of the Blevins Franks Group Limited (BFGL) whose registered office is Gasan Centre, Triq il-Merghat, Zone 1, Central Business District, Mriehel CBD1020, Malta. This promotion has been approved and issued by BFWML, BFF and BFFM for respective use in the EU and UK.

Follow this link for FRENCH version

 

© Blevins Franks