Not everyone will be able to access all the new pension freedoms through their current pension scheme. Consolidating older pensions into a more modern vehicle may not only allow greater flexibility on how income can be taken, but could allow flexible access without cutting funding limits. Read on to see how this could help your clients.
Julie is in her late 50’s with adult children. She has saved into a variety of money purchase pensions and a mix of cash and stock and shares ISAs which is her contingency fund. She plans to phase her retirement by going part-time and will supplement her income from her pension savings – using a combination of tax free cash and/or income.
Her existing contracts (all uncrystallised) are a Contracted In Money Purchase (CIMP) and a Section 32 (S32), together valued at £200,000 plus a personal pension valued at £400,000.
Julie’s main aim is to be able to use all her savings to generate a tax efficient income, both in semi-retirement and later in full retirement. Being able to take tax free cash and/or income from her pension as and when it’s needed is therefore a big draw for her. She also wants ready access to her funds. And she’d like to leave a legacy for the kids if she can.
Having researched her existing plans she is informed that, aside from higher charges and limited investment choice compared to some more modern pension contracts, the main problem is that none of her pensions allow flexi-access drawdown.
The CIMP and S32 offer no flexibility at all – an annuity is the only income option. The personal pension is a little more flexible as phased withdrawals can be taken using the new ‘uncrystallised funds pension lump sum’ (UFPLS) option. But this is not the same as flexi-access drawdown – each withdrawal will consist of 25% tax free cash and the balance of the withdrawal taxed as income. Taking tax free cash and leaving the balance isn’t an option under UFPLS. And although Julie could re-invest the UFPLS money, returns would be taxable, no longer protected by the pension wrapper, and the capital would also potentially be subject to IHT.
Let’s assume, for example, that next year, Julie reduces her hours and her income falls to £2,500 short of the higher rate tax threshold. If she wants to top up her net spendable income by £7,500 a year and she takes this from her existing personal pension using phased UFPLS, she’ll need to withdraw a total of £10,000 (see example 1).
The other consequence of Julie drawing funds under UFPLS is her annual allowance will immediately drop to £4,000 a year and she’d lose access to any unused relief through carried forward. This may be important to Julie if she wants to make any substantial contributions in the future, such as moving some of her ISA savings into her pension while she still has earned income.
The recommendation is she consolidate all her pensions into a SIPP that allows ‘flexi-access’ drawdown. This will provide the following benefits:
Returning to example 1, if Julie still needed £7,500 of net spendable ‘income’ to supplement her salary, she could take a mix of tax free cash and income under flexi-access drawdown, perhaps keeping the income element within the basic rate band, and so avoiding higher rate tax (see example 2). In this way, only £8,000 needs to be withdrawn from the pension – not the £10,000 that would have been needed under the personal pension.
Returning to the example again, Julie could meet the £7,500 requirement by taking it all out as tax free cash.
If you have clients that have pension arrangements and they are considering retirement in the next few years then reviewing the options available from these plans now will make sure they can draw benefits as they want to. Even if they are not considering retirement, reviewing existing plans could mean that they pay lower charges and that they are invested into a good spread of investment funds that will make their money work as hard as possible within their individual attitude to risk.
If you would like Savvy to provide your clients will a pension review service please contact us on 0845 680 8910.
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