Pension Freedom
Pension Freedom was launched by Chancellor George Osborne on 6th April 2015.
It gave people the opportunity to access their private pension plans without the restrictions previously applied such as the need to purchase an annuity.
With the greater flexibility that Pension Freedom brings, the individual needs to exercise an element of caution so that they do not outlive the pension proceeds.
INCOME WITHDRAWAL
With the advent of “Flexible Drawdown” the old restrictions on what could be withdrawn have been removed and clients are able to withdraw any amount up to the value of the entire fund.
The following provides a synopsis of the rules that apply to individuals pre and post age 75.
The level of income from the pension is set at what is required by the member and may be varied at any time. The income is taxed as earned income at your marginal rate.
There is no longer any requirement to take income either prior to or post age 75.
If death of the policyholder occurs before age 75, the tax treatment depends on whether the benefits have been put into payment, i.e. crystallised, or whether they have not been put in to payment, i.e. uncrystallised.
Uncrystallised funds may be paid as a lump sum free of tax or moved in to drawdown where all withdrawals will be tax free.
Crystallised funds can be paid as income up to the full value and will be treated as being exempt from income tax.
There are additional rules which would need to be satisfied for this to occur.
On reaching age 75, the tax free cash lump sum remains available, but if not taken before death the option cannot be passed on to the beneficiary(ies).
All withdrawals will be subject to income tax at their marginal rate.
On death the beneficiary will take over ownership and can continue to make withdrawals, subject to income tax at their marginal rate.
Retirement Options
Traditionally, there used to be only one option when it came to using the funds you had saved for retirement in money purchase pension plans. You had to use your entire pension fund – less any used to provide tax-free cash – to buy a pension, through the purchase of an annuity.
Over many years, thanks to changes in legislation, more modern and flexible alternatives have appeared – alternatives, which allow you to take control over your future.
By considering each of these options in turn we should be able to identify the most suitable choice for you and ensure that your retirement income can be tailored to meet your needs over the coming years.
The main options that are currently available are as follows:
- Annuity (Guaranteed, impaired life, enhanced, investment linked and capital protected)
- Phased Retirement
- Hybrid Schemes
- Flexible Income Drawdown (which replaced Capped Income Withdrawal from 6th April 2015)
- Combined Phased Retirement/Income Drawdown
- Entire fund access (UFPLS )– Pension Freedom
Allowances & Protection
The concept of capping the value of pensions was established on 6th April 2006 (A Day) with the introduction of a lifetime allowance of £1.5 million.
This increased each year to a maximum of £1.8 million in 2012. However, this has since seen a steady reduction to reach a low of £1 million but has since been linked to CPI.(2020/21 – £1,073,100)
The regular changes in the lifetime allowance led to a complicated system of protection which individuals could apply for based upon the total capital value of their pension benefits, or where they no longer contributed to or accrued benefits greater than CPI.
There are now a number of different forms of protection in existence.
Primary protection and enhanced protection were introduced in April 2006.
Fixed protection was introduced originally in 2012 and to this has been added Fixed Protection 2014 and Fixed Protection 2016.
Individual protection was introduced in 2014 and IP2016 has been added since.
Along with the limitations placed on the capital value of pension funds and benefits, the Chancellor has restricted the tax relief available on pension contributions made in any one tax year.
The current annual allowance will start to suffer from tapering where the adjusted income exceeds £240k.
For those in Defined Benefits schemes, they need to add their pension input amount to their earnings, less the personal contributions they have made to the scheme.
DID YOU KNOW?
The radio operator of RMS Titanic, Jack Phillips, was born and lived in Farncombe, worked in Godalming and at sea. He is famed for remaining at his post, sending repeated distress calls, until the ship sank. Phillips is commemorated in a number of ways around the town, including a section of Godalming Museum, a memorial fountain, cloister and garden walk near the church, and a Wetherspoons-chain public house named in his honour.