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From 6th April 2015, new rules come into force to give people more freedom over their pension savings.
Once you reach the age of fifty-five, there will now be three primarily options available which can either be used exclusively or in combination:
Whichever route that you choose, the pension commencement lump sum (PCLS) of 25% of the pension pot remains free of tax.
It is worth bearing in mind that a pension scheme does not have to offer all these options and some may choose not to. However, you have the right to transfer your pension savings to a pension provider that offers the option that you want to use.
Whilst this gives much greater freedom, there is a sting in the tail! Payments from an annuity, a drawdown or a UFPLS (after the 25% PCLS) are taxable as income.
If you have a pension fund of £90,000 with no other income and you opt to take your pension savings in one lump sum, you will have a tax bill of £16,400.
Moreover, to protect tax revenues, pension providers are deducting tax on an emergency code basis and leaving the pension recipient to recover any overpayment of tax. As a result, in our £90,000 scenario, the amount of tax deducted is likely to be in the region of £28,800.
Although HMRC has accelerated the process to claim the tax rebate, the onus is still on the individual to recover any overpayment of tax.
By taking the UFPLS in stages, you can dramatically reduce the amount of tax due. On our £90,000 example and based on 2015-16 tax rates, if you withdrew this over three years in equal amounts, the total tax bill would reduce to £7,140. Over four years, this would reduce further to £5,020.
Measures have been put in place to prevent large amounts being taken from a pension pot to fund further pension savings. This is to stop the fashioning an artificial tax saving. If you take an income under these new flexible access arrangements, this will activate a restriction to cap your money purchase annual allowance (MPAA) to £10,000.
If you have any concerns or questions on accessing your pension savings or would like a detailed tax evaluation, please contact us at firstname.lastname@example.org for an initial consultation that is free and without obligation.
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