The new pension regime coming into effect on 6th April 2015 provides much more flexibility for drawdown pensions. Many people will want to take advantage of this, but it is important to consider all the implications to establish what will be most beneficial for your personal situation.
The new pension regime coming into effect on 6th April 2015 provides much more flexibility for drawdown pensions. Many people will want to take advantage of this, but it is important to consider all the implications to establish what will be most beneficial for your personal situation.
Current rules
You can start to take an income from your pension funds from age 55 under the “drawdown pensions” regime. The alternative is to buy an annuity. Drawdown provides an ability to take income from the underlying investments, allowing personal investment control of the funds and flexibility of the income drawn. You have a choice of “capped drawdown” and “flexible drawdown”.
With capped drawdown, your pension remains invested and you take an income. The amount of income is capped at 150% of an equivalent annuity (the “GAD rate”).
Under flexible drawdown, you can withdraw as much of your pension as you like. You could take the whole fund in its entirety as a lump sum, or take part withdrawals of however much you need.
UK residents receive the 25% tax free pension commencement lump sum, but the rest is taxable. For those living outside the UK, tax would be chargeable on some or all of the withdrawal, dependent on taxation in your country of residence.
To access flexible drawdown you must meet the “minimum income requirement” of £12,000 of secure pension income. Not all pension income counts towards this, for example, income drawdown pensions, purchased life annuities, QROPS and QNUPS do not.
With capped drawdown, you can contribute up to £40,000 per year into a pension fund, tax free. However, if you opt for flexible drawdown, you are no longer able to contribute to your pension fund.
UK nationals living abroad are able to continue to contribute to a UK pension and get tax relief, provided they had a suitable plan in force before they left the UK. The amount they get relief on is capped at £3,600 per annum for five years following their departure from the UK, or 100% of their net relevant earnings if applicable. However, although the legislation allows this, some providers still will not accept contributions from overseas residents.
When the balance of the fund is paid to your beneficiaries on death, there is a 55% tax charge if you are aged 75 or over, or if you have started taking benefits.
New rules from 6th April 2015
As announced on 29th September, the 55% death charge will be abolished. If you die under the age of 75 your pension pot will pass to your beneficiaries tax free, even if it is in drawdown. If you are over 75 years, your heirs will pay their marginal rate of tax. In this case, if they opt take it as a lump sum, a 45% fixed rate will he charged (though the government hopes to change this to their marginal rate from 2016).
Both capped drawdown and flexible drawdown will be replaced by a new “flexi-access drawdown”.
This new form of income drawdown has no upper limit on how much members can take. It works similar to flexible drawdown, but with no minimum income requirement.
As before, expatriates can continue to contribute to their existing UK pension, providing their scheme allows it.
However, note that under this new regime you can only contribute up to £40,000 tax free a year if you have not taken any benefits from the fund. If you take anything, even a tiny one-off withdrawal, then the £40,000 allowance drops to £10,000. If you exceed £10,000 there is a tax charge.
Many people took their pension commencement lump sum at, or after, the minimum retirement age (50 until 2010, 55 today) by moving into capped drawdown, but have not started taking an income. Those who are still earning have been able to contribute up to the £40,000 limit to their pension fund each year.
Once the new pension rules come into effect next April, many people will consider moving from their existing drawdown plan into the new flexi access plans.
However you need to consider this very carefully. If you are still able to contribute to a UK plan, and the amount is above £10,000 a year, then you may be better off keeping your current plan. Middle to high earners could easily exceed the £10,000 limit. Even if you do not do so now, you may sometime in the future.
This is one example of why you should not rush into anything when the new rules come into effect. You need to consider all the available options and how they affect you personally, both from a tax and long-term financial security point of view. You have to consider tax in your country of residence and how it interacts with the UK tax rules.
Specialist, professional advice is essential to make sure you understand all the implications and make the best decision for you. For peace of mind, your adviser should be authorised by the UK Financial Conduct Authority (FCA). Indeed, it will be a statutory requirement for transfers out of private sector defined benefits schemes to be regulated by the FCA.
29 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.
