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Pension Power

Investing in pensions is still a tax efficient way of saving for your retirement. However, the tax treatment when you come to the point of taking your retirement benefits depends on a number of factors:

  1. The level of fund
  2. How much pension income you need
  3. What other pension income you have
  4. Your age
  5. When you think you are going to die!

It used to be just a question of which type of annuity to take but with the real security of a guaranteed income. This changed in 2006 when the concept of drawing down from funds was introduced which meant funds could remain invested and under the investor's own control.  No compulsory annuity purchase was required until age 75.

The changes introduced in 2011 removed the requirement to buy a secured income through an annuity altogether. This has allowed the investor greater flexibility in terms of taking benefits but means he assumes total responsibility for the investment risk.

Unsecured income changes

From 27 March 2014, the amount that can be drawn from funds as an unsecured income will increase quite dramatically.

So, what can be taken out and when?

  1. 25% of the fund as a tax-free lump sum (subject to the Lifetime Allowance limit).
  2. An annual pension income equal to 150% of an equivalent annuity. This would be taxable income at your marginal rates. This is known as a capped drawdown pension.
  3. If you have other guaranteed pension income of £12,000 per year, you can draw any amount and this could be the whole fund. This will be taxable income at your marginal rate. This is known as a flexible drawdown pension.

Other points

There are some other points worth noting:

  1. Where there is only a small pension pot, an individual can draw out the whole lump sum if it is worth £30,000 or less.
  2. On death, the current rules are that a flat 55% tax charge will apply where unsecured income has been taken. The government have announced that this is under review.
  3. The 55% clawback charge that applies where the fund value exceeds the Lifetime Allowance is unchanged.

Going forward

On the face of it, there are some positive changes as regards greater flexibility and control that an investor has over his pension. This may encourage people to invest. Technically they no longer have to hand over their funds to an insurance provider for an annuity and then worry about living long enough to get their money back. However, it is important to weigh up the flexibility against the risk of running out of money and living too long. Never mind - the government have promised there will be some free impartial advice on its way and if that doesn't work, we can help!



Date: 25th March, 2014
Author: Gill Tallon


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