Making the most of pension freedoms

Since April 2015, you have greater flexibility over how you take money from your pension - any time from age 55.

Please note if you are planning to take money out of your pension in the near future, you are entitled to free, impartial guidance from Pension Wise. Visit www.pensionwise.gov.uk or call either 0800 138 3944 or 0300 330 1003 (from outside the UK +44 20 3733 3495), if you wish to use this service.

From age 55, you can:

• Move in to flexi-access drawdown A pension income drawdown arrangement where there are no limits on how much can be taken out of a pension fund or when. All income drawdown arrangements set up from 6 April 2015 onwards are offered on a flexi-access basis. Once a pension fund is moved into flexi-access drawdown, an investor can only make new pension contributions (including tax relief) of up to £4,000 a year. See also Capped drawdown. and take up to 25% of your fund as a tax-free lump sum/sums and the rest as taxable income. The tax-free lump sum in this case is known as a pension commencement lump sum (PCLS) The tax-free lump sum available on both defined benefit and defined contribution pension schemes. Typically 25% of the pension fund (subject to a maximum of 25% of the lifetime allowance) can be taken as a tax-free sum. The rest of the pension fund must be used to provide an income – in the case of a defined contribution scheme this can be done by buying an annuity or using income drawdown.. Both lump sums and income can be taken as and when you wish. The rest of the fund can remain invested so it has potential to continue to grow.
  
  
• Take your pension as a single or series of lump sums, of which 25% will be tax-free and 75% will be taxable. This is known as taking uncrystallised funds pension lump sums (UFPLS) A way of taking money out of a defined contribution pension without going into income drawdown or buying an annuity. UFPLS allows a pension fund to be taken as a single, or a series of, lump sums. A quarter of each sum withdrawn is tax-free while the remaining 75% is added to the individual's taxable income in that year and taxed accordingly. Choosing to take UFPLS rather than moving to income drawdown can be less tax-efficient for some people as every UFPLS payment is subject to 75% tax. By contrast, income drawdown allows the 25% tax-free sum and the remaining taxable income to be taken independently, which can allow for more careful tax-planning. Taking an UFPLS also limits the amount that can be contributed into pension and receive tax relief to £4,000 per tax year.. The remainder of the fund can remain invested so it has potential to continue to grow.
  
  
• Use some or all of your pension fund to buy an annuity An insurance contract that, in return for a one-off lump sum payment, promises to pay a guaranteed income either indefinitely or for a fixed period, depending on the type of product bought. Investors may choose to use some or all of their pension fund to buy an annuity but are under no obligation to do so. to provide a guaranteed income. Please note that James Hay does not provide annuities and therefore you will need to shop around for the best product for your needs.
  
  
• If you are in capped drawdown in an existing pension that you are looking to transfer to us, you can continue in capped drawdown.
  
  
• Do any combination of the options above, where possible.

Opportunities

1: Flexible access: You can easily vary the amount of money and when you take it to meet your current and future needs.

2: Extended growth potential: You can leave your pension fund invested until you need it, in order to maximise its growth potential.

3: Tax-planning: You can use flexi-access drawdown A pension income drawdown arrangement where there are no limits on how much can be taken out of a pension fund or when. All income drawdown arrangements set up from 6 April 2015 onwards are offered on a flexi-access basis. Once a pension fund is moved into flexi-access drawdown, an investor can only make new pension contributions (including tax relief) of up to £4,000 a year. See also Capped drawdown. to plan for your changing tax status. For example you may choose to take your tax-free lump sum element while you are still working and subject to a high level of tax. You could then take the taxable income when you stop working and may fall into a lower tax bracket.

4: Estate planning: On death, any money left in your pension fund will not form part of your estate for tax inheritance tax purposes. If you die before age 75, pension funds are passed on tax-free to your beneficiaries. Should you die after 75, you can also pass your pension on to your beneficiaries but they will be taxed as income. This can make pensions a tax-efficient way to pass on assets.

But there are also risks

These freedoms also present some major risks:

RISK 1: Losing pension guarantees: Some individuals are choosing to transfer their employer’s defined benefit (‘final salary’) pension schemes A pension plan where the income received in retirement is guaranteed, based on an individual’s salary and number of years of service. For example, some DB pensions may pay 1/60th of salary for each year of service so after 30 years, a worker would be entitled to a pension that is 30/60ths (or half) of their salary before retirement. Many companies have replaced their DB pension schemes with defined contribution plans because the cost of providing the promised pension is considered unsustainable. Also known as a final-salary pension scheme. into personal pensions to take advantage of the new freedoms – but are losing valuable pension guarantees in the process.

RISK 2: Becoming the victim of a scam: Individuals looking to access their pension fund are often being targeted by fraudsters seeking to part them from their money by promising unrealistic returns or promising to help them withdraw their pension. Learn more here.

RISK 3: Running out of income: Withdrawing large lump sums or very high levels of income can deplete the pension fund so there isn’t enough to provide a sustainable income throughout retirement.

RISK 4: Paying too much tax: Whilst 25% of your pension is normally available tax-free any further money you take out, will always be subject to income tax. This may mean if you take out a large amount in a single tax year, you could end up in a higher rate tax bracket and with a large tax bill.

RISK 5: Falling fund values: Keeping a pension fund invested in the stock market can see its value fluctuate – perhaps at a time when you may not have enough time to recover from market falls. If your pension fund is small, you may find it hard to diversify investments sufficiently to spread risk.

RISK 6: Uncertain income levels: Unlike an annuity, flexi-access drawdown offers no guarantees about the level of income available or how long it can be paid for.

Please note: Flexibly accessing your pension – either through UFPLS or flexi-access drawdown – will limit how much you can pay in to any pension scheme to £4,000 a year.

Getting advice and guidance

The choices you make for your pension fund can determine the level of income you receive for the rest of your life. For this reason, we strongly encourage you to seek regulated financial advice and guidance to decide the best course of action to take.

James Hay cannot provide advice. If you would like to speak to a regulated financial adviser but do not have one, please visit www.unbiased.co.uk to find a regulated adviser in your area.

If you are planning to take money out of your pension in the near future, you are also entitled to free, impartial guidance from Pension Wise. You can receive Pension Wise guidance online, over the phone or face to face. Visit www.pensionwise.gov.uk or call either 0800 138 3944 or 0300 330 1003 (from outside the UK +44 20 3733 3495), if you wish to use this service.

Please note: You can only take advantage of the pension freedoms from age 55. Anyone thinking of withdrawing lump sums from their pension fund should consider the impact this will have on future retirement income.

Factsheet
Read more about your options for accessing your pension here.

The Money Advice Service has produced a brochure to explain your options at retirement.