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Pensions – Changes to accessing funds

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Alan Boby, Partner at UK200Group member firm Ellacotts LLP, explores the changing nature of pensions access following changes to the rules earlier this year.

Most people look for financial security in retirement and the recent radical reforms to pensions accessibility have already proved popular. The changes have opened up two new options with technical sounding names, as follows:

1. Flexible access drawdown

All new income drawdown contracts now fall under flexible access drawdown rules. This allows the holder to take 25 per cent tax-free pension commencement lump sum and the remainder of the amount as income, taxed at the person’s marginal rate of income tax.

Financial advice should be sought, as the new rules might trigger a reduction in any further amounts that can be put into pension funds (or the “annual allowance”). This reduction is known as the Money Purchase Annual Allowance (MPAA), which restricts the annual allowance from £40,000 to £10,000 for all defined contribution pension pots. Taking just the 25 per cent tax-free pension commencement only, will not trigger the MPAA.

In addition, there are income tax implications that could be disadvantageous because any amounts taken as income might push the individual into a higher tax band.

2. Uncrystallised Funds Pension Lump Sums (UFPLS)

A UFPLS is an ad hoc lump sum drawn from an otherwise uncrystallised money purchase pension pot. Taking ‘slices’ of a pension fund could be a useful method of controlling tax liability.
25 per cent of each UFPLS will be free of income tax; the remaining 75 per cetn will be subject to income tax at the individual’s marginal rate. By taking payments like this the remaining pension fund remains uncrystallised.

Taking any UFPLS will trigger the MPAA mentioned above.

Dependents Pension

If a pension holder dies under age 75, their fund will pass to their nominated beneficiary and no tax is payable. If a pension holder dies over age 75, the fund may be passed on to their nominated beneficiary but will be taxed (at 45 per cent in tax year 2015/16), and at the beneficiaries’ top tax rate in subsequent years. Beneficiaries themselves can ‘pass on’ the pension pot and this is an advantageous way to transfer value down the generations without paying inheritance tax.

Clearly it is important to take advice before taking action and understand all the options and their ramifications. For further details call Alan Boby on 01295 250401 or email aboby@ellacotts.co.uk.

Alan Boby

Ellacotts LLP


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