Pension Withdrawals
Are there any tax consequences when I take my pension benefits?
The lifetime allowance is the maximum amount of benefits an individual can build up in registered pension schemes without suffering a tax charge when benefits are taken. The Standard Lifetime Allowance for tax year 2022/23 is £1,073,100.
If the value of the benefits being taken exceed an individual's available lifetime allowance, then a Lifetime Allowance Charge (LAC) is due on the excess. This tax charge is 55% if taken as a cash lump sum or 25% (plus income tax at the individual's marginal rate) if taken as a pension.
How much tax-free cash be taken from my pension?
Typically, it is possible to take up to 25% of the value of the benefits being brought into payment as a tax-free lump sum. There are, however, some circumstances where an individual's tax fee cash entitlement can be more than this.
Secured Pension
- You may use the whole of your pension fund, after any tax-free cash has been paid, to purchase a conventional annuity from the provider which offers the best annuity rate on the open market.
- Alternatively, it may be possible, after any tax-free cash has been paid, to instead purchase an annuity from your current pension provider. However, if your current provider does pay annuities, this will normally only be attractive if the annuity offered by the current provider is higher than the best comparative annuity available on the open market. This might be the case if, for example, your current plan has 'guaranteed annuity rates.'
- You may use the whole of your pension fund, after any tax-free cash has been paid, to purchase a 'with-profits' annuity, either from your current provider (if available) or another provider.
- You may use the whole of your pension fund, after any tax-free cash has been paid, to purchase a unit linked annuity either from your current provider (if available) or another provider.
- You may convert your retirement fund to an annuity income in stages, over a number of years. This is commonly referred to as staggered vesting or phased retirement and depending on scheme rules this is now possible both before and after age 75.
Uncrystallised Funds Pension Lump Sum (UFPLS)
Under the UFPLS option, an individual can take a single or series of lump sums from their uncrystallised money purchase funds, of any amount, without actually having to designate them to drawdown first. 25% of the payment is normally tax free with the balance subject to income tax at the recipient's marginal rate(s).
Trivial Commutation
As long as certain conditions are met, it may be possible to take all your pension benefits, from a defined benefit arrangement, as a lump sum if the value of all your benefits under all arrangements, including any already in payment, does not exceed £30,000.
Small pot lump sum
As long as certain conditions are met, it may also be possible to take all your pension benefits, from either a defined contribution or defined benefit arrangement, as a 'small pots' lump sum if the value of the benefits being commuted (ignoring the value of any other benefits you may have) does not exceed £10,000.
Flexi-Access Drawdown
Flexi-access drawdown is a type of income drawdown that started 6 April 2015 allowing individuals of pension age to draw any amount from their money purchase pension fund, whenever they want to. This option therefore enables 'unlimited' amounts to be withdrawn at any time. The first 25% of the fund that is being crystallised can normally be paid as a tax free cash sum, but the whole amount of any withdrawals taken by the individual over and above the initial tax free cash sum will be subject to income tax at the member's marginal rate(s) in the tax year they are paid.
Existing pre 6 April 2015 flexible drawdown arrangements automatically converted to flexiaccess drawdown on 6 April 2015 but unlike the under the 'old' flexible drawdown rules, there is no longer any requirement for someone accessing flexi-access drawdown for the first time after 5 April 2015 to have a minimum level of secure income.
As well as being an option for a member's own pension funds, flexi-access drawdown can also be used, after the member has died, to pay a drawdown pension to a beneficiary of the member even if the beneficiary is under the normal minimum pension age (currently age 55).
Lump sum death benefits can also be paid from flexi-access drawdown funds at any age. For lump sums paid before 6 April 2015, this tax charge was 55%. However, for lump sum payments made after 5 April 2015 this tax charge is reduced to 0% if death occurs before age 75. If death occurs on or after age 75, this tax charge is levied at the recipient's marginal rate (reduced from 45% in 2015/16).
Are flexi-access drawdown pension funds tested against the lifetime allowance?
Normally, benefits are only tested against the lifetime allowance once. If, however, funds are designated to flexi-access drawdown, there can be two tests during the member's lifetime:
- The first when initially going into income drawdown, and
- The second if the fund is used to buy an annuity or (if earlier) the member is still in drawdown when they reach age 75
The crystallised value of the benefits at the first test is the amount of tax free cash paid plus the residual value of the fund designated to drawdown.
At the second benefit crystallisation event, it's the value of the remaining drawdown fund less the amount originally moved into drawdown that is tested against the member's available lifetime allowance.
If the member’s available lifetime allowance is exceeded after either or both of these benefit crystallisation events, the 'excess' will be subject to a lifetime allowance tax charge.
Can pension contributions continue after a member has designated their funds to flexi-access drawdown?
Taking the tax free cash sum and designating the balance to flexi-access drawdown will not, in itself, have any impact on the amount of tax-relievable pension contributions that can continue to be made by or on behalf of that individual to money purchase (defined contribution) pension arrangements.
When, however, an individual who has designated funds to flexi-access drawdown first takes any income from that flexi-access drawdown pension, (and assuming that they haven't already accessed benefits 'flexibly' from any other money purchase pension arrangements before this one), this will trigger the £4,000 money purchase annual allowance (reduced from £10,000 in 2015/16 and 2016/17).
Once the £4,000 MPAA has been triggered, this means that they will still have an overall annual allowance of £40,000 but no more than a maximum of £4,000 can be paid to money purchase schemes without incurring an annual allowance tax charge. Carry forward of unused annual allowance cannot be used to increase the MPAA beyond £4,000.
Past performance is not a guide to future performance. Changes in the exchange rate will affect the sterling value of your investment. The value of investments (including property) and the income derived from them may go down as well as up.