Retirement Planning
The value of pensions and the income they produce can fall as well as rise. You may get back less that you invested.
Whilst retirement may represent a major change in your lifestyle allowing you to take things at a more leisurely pace and do some of those things you have always dreamed
off. Your ability to do this will be dependent on your available finances so making the right choices could be vital.
On 6 April 2015 new pension rules came into force, giving you much greater flexibility over how you use your pension savings and the options you have in retirement, with this comes greater emphasis
on making the right decisions when taking your hard earned savings.
These changes include the freedom to access the whole of your pension fund, more choice over how to receive the tax-free cash from your fund, changes to death benefits and changes to the
contributions you can make.
Whether you have a personal pension, a stakeholder pension or a group personal pension these new rules are far-reaching, and they could have significant tax implications. It is therefore important to
take advice on the various options open to you.
The first of the new options is “flexi-access drawdown” which in essence places no limit on the amount of income you can take from your pension fund, this means that it would be possible to take the whole of your pension fund in one go, however it may not be tax efficient to do so.
If you will be dependent on your pension to support you through your lifetime you may need to consider taking a lower level of income to help reduce the risk of financial ruin.
Currently you can 25% of your fund as a tax free lump sum if you have not previously used that fund for drawdown purposes with the remainder of the fund staying in your pension to provide you with an income.
It is important to remember that the amount of flexi-access fund withdrawn to provide you with an income will be taxed at your marginal rate of income tax therefore if you take too much income this may move you into the next tax bracket and result in you paying a higher rate of tax.
A new option has been introduced by the Government which is called the Uncrystallised Funds Pension Lump Sum (UFPLS).
This option is for funds not already in drawdown and allows you to take a one-off payment from your pension or a series of lump sums leaving the remainder of the fund in your pension invested, the first 25% of each UFPLS is tax free, with the balance being subject to marginal rate tax.
For anyone who is in drawdown as of 6 April 2015 (capped or flexible) the new options differ depending on which one you currently have.
Capped Drawdown
If you are currently in capped drawdown you will have a maximum level of income that you can take each year and this reviewed every three years up until you are 75 and annually thereafter.
From 6 April 2015 you will be able to continue to take capped drawdown or you will also have the option to the new flexi-access drawdown whereby the amount of income you can take will be unlimited and there will be no further maximum income level reviews.
It is also important to remember that if you take the decision to move from capped drawdown to flexi-access drawdown that the amount you can contribute to your pension each year will be reduced.
Annuities
You will of course still have the option of purchasing an annuity which for some people may still be the right choice to give a guarantee of an income for life paying a level income or increasing over time.
There are several variations of the way annuities can be taken such as Lifetime annuities, Fixed term annuities, purchased life annuities, enhanced life annuities.
You can nominate whoever you choose to receive your death benefits, this can be your spouse, children, grandchildren or even someone unrelated to you, you can also leave some or all of your pension fund to charity.
The beneficiaries of your pension fund can elect to take the fund as a lump sum or leave the fund invested and take an income under the new flexi-access drawdown rules. If they do choose the flexi-access option, then they can take income as and when required or leave the funds invested thereby benefitting in the tax advantaged pension.
What about tax on the death benefits?
The tax treatment of your death benefits will depend on two things.
- Your age when you die.
- Whether or not the funds are designated to your beneficiary within two years.
If you die before your 75th birthday and your pension funds have been designated to your beneficiaries within two years they will be paid tax-free, they do not however
need to take the money out within the two-year period.
If you live beyond your 75th birthday or if you die earlier but your pension funds are not designated within the two-year period, then the death benefits will be taxed; the taxation that would
normally be applied would be at the beneficiary’s marginal rate of income tax.
If your beneficiary has not withdrawn the whole of the pension fund before their subsequent death, then the pension funds can be passed on again so your beneficiary will be able to nominate anyone
they want the funds to go to following their death. It is possible to have unlimited successors so in essence your pension fund could be passed on for generations if it is not all
withdrawn.
The new rules are far reaching and far more flexible and it may be that a combination of all the above may be best for you, therefore we would be more than happy to discuss these options with you in
more detail so please contact us to arrange a meeting.
Tax treatment varies according to individual circumstances and is subject to change.
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CJP Financial Planning Limited is registered in England and Wales. Registration Number: 08379265 Registered Address: The Financial Advice Centre, 2 Queens Parade, Bloxwich, Walsall, England, WS3 2EX. CJP Financial Planning Limited is an appointed representative of Quilter Wealth Limited and Quilter Mortgage Planning Limited which are authorised and regulated by the Financial Conduct Authority.