8th August 2014
A new way to take your pension cash has been announced by the government as part of its relaxation of pension rules and plans to give consumers access to their savings.
From 6 April 2015 retirees will no longer have to buy and annuity or a drawdown policy in order to get their hands on their savings, with the introduction of the ‘uncrystallised fund pension lump sum’ (UFPLS).
The UFPLS will allow access to pension savings in one lump or in any combination of amounts of the retirees’ choosing. Every time money is withdrawn from the UFPLS, the first 25% of the amount taken will be tax-free and the remainder taxed at the retiree’s marginal rate of income tax.
This means that someone with a pot of £50,000 who withdraws £10,000 will pay no tax on £2,500 of the money but will pay income tax – if it’s due – on the remaining £7,500.
Taxing the withdrawn income in this way is different to the way income is taxed through drawdown – where the money remains invested and income or lump sums are taken from the fund.
A person in drawdown pays no tax on the first 25% of their fund and taxed at their marginal rate of income tax after this. So someone with a £50,000 pot would not pay any tax on the first £12,500 they took out and then pay income tax on the rest.
This change in taxation has a knock-on effect as to whether a pension pot is taxed when the retiree dies. A pension in drawdown is subject to a 55% ‘death tax’ when the pensioner dies before the money is passed on to dependents.
However, under a UFPLS the money in the pot would be ‘uncrystallised’ – or untouched – so would not be subject to the 55% tax charge before being passed on to dependents. Money in drawdown is seen as ‘crystallised’ because the tax-free cash is taken first rather than in increments.
The new option will mean savers no longer have to buy an annuity or drawdown although it is unsure as yet which institutions will offer the UFPLS or whether pension providers will allow access to pension funds under the UFPLS rules for a nominal fee.
Dave Roberts of Towers Watson said the options that retirees choose will depend on their personal circumstances,; how they want to take the money and tax efficiency.
‘How it makes sense to take money out of a pension can depend on the individual’s circumstances. If they are still working and don’t expect their future retirement income from other sources to use up their full tax allowance, they might prefer tax-free withdrawals now and taxable withdrawals later.’