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Pension reforms introduction of guaranteed guidance

Removal of the need to purchase an annuity at retirement and changes to Income Drawdown will become effective from 6th April, 2015.

Whilst there will be no requirement to purchase an annuity you may still choose to do so as it will remain as one of the most secure methods of guaranteeing a certain level of income in retirement.

What is Income Drawdown?

Income Drawdown is a method of drawing an income from your SIPP once you reach retirement age. Your funds remain invested until you choose to draw them down and you can continue to manage your investment strategy.

What is Capped Drawdown?

Capped Drawdown - income drawdown currently available from age 55; subject to a maximum annual cap on the income you can take.

  • The maximum income that can be taken is 150% of GAD (Government Actuaries Department Rates) with GAD being broadly equivalent to a level, single life annuity.
  • There is no minimum income requirement for Capped Drawdown.
  • Income limits are reviewed every 3 years until you reach age 75 when the limit will be reviewed annually.
  • Where a lump sum death benefit is paid from a SIPP in Capped Drawdown a tax charge of 55% applies.

What is Flexible Drawdown?

Flexible Drawdown - income drawdown currently available from age 55; not subject to a cap providing you can demonstrate you are in receipt of a guaranteed pension income of at least £12,000 per annum (known as the Minimum Income Requirement).

  • There is no maximum or minimum income limit for Flexible Drawdown.
  • Where a lump sum death benefit is paid from a SIPP in Flexible Drawdown a tax charge of 55% applies.
    • If you’ve opted for Flexible Drawdown you’re no longer able to pay any additional contributions into your SIPP.

Proposed Changes from 6th April 2015

Will a tax-free lump sum still be available at retirement?

  • Yes – a one off tax free lump sum (pension commencement lump sum) of up to 25% of the fund value or the lifetime allowance (whichever is the lower) will still be available.
  • If you don’t need the tax free lump sum as one payment you can choose to take the 25% tax free lump sum across a number of withdrawals (known as uncrystallised fund pension lump sum – UFPLS).
  • Any withdrawals above 25% of the pension fund will be subject to income tax at your marginal rate (e.g. 20%, 40% or 45% depending on whether the payments take you into the higher rate tax thresholds).

What options will I have to take an income at retirement?

  • From April 2015 if you take 25% of your fund as a tax-free lump sum you’ll be able to choose how you take any income from the remainder of your pension fund.
  • You’ll be able to take the whole fund in one go, take smaller lump sums when you want them or take a regular income.
  • You’ll be able to draw your income directly from your pension fund (through Flexi Access Drawdown) or by purchasing an annuity from a Life Insurance Company of your choice.
  • You will be able to take income as a combination of these.

From 6th April 2015, Flexible Drawdown will be replaced by Flexi Access Drawdown.

Flexible Drawdown enabled customers to take an unlimited income and was only available if customers had a secure annual pension income of at least £20,000. 

  • You now qualify if you have a secure annual pension income of at least £12,000.
  • From April 2015 the £12,000 cap will be removed altogether and everyone in Flexible Drawdown will automatically be converted to the new Flexi Access Drawdown, meaning you can take whatever level of income you choose from your pension subject to income tax at your marginal rate.

From 6th April 2015, Capped Drawdown will only be available to those already in Capped Drawdown

  • Capped Drawdown will continue to be available if you are already taking income drawdown payments (i.e. where a maximum limit applies).
  • The maximum limit will continue to be applied to the amount taken unless you request to move to Flexi Access Drawdown or withdraw more than your Capped Limit, in which case Flexi Access Drawdown will automatically be applied.
  • Unless you convert to Flexi Access Drawdown you will have a contribution limit of £40,000 each year.
  • Capped Drawdown will no longer be an option if you’re taking benefits for the first time from the 6th April 2015

What happens if I only have a small amount of pension savings?

  • Greater pension flexibility also applies to withdrawals if you only have a small amount of pension savings and want to withdraw them in one go as a lump sum.
  • You were previously allowed to take your whole pension as a single lump sum only if your combined pensions were worth less than £18,000 (known as trivial commutation). This limit has now increased to £30,000
  • Currently you need to be 60 years old to access your pension in this way, but from April 2015 you will be able to access your whole fund as a single lump sum from age 55.
  • You could also take your whole pension fund as a small lump sum if you had an individual pension arrangement worth less than £2,000, regardless of your total pension savings. This limit has now increased to £10,000.
  • The maximum number of small lump sums that you can receive has also increased - from two to three
  • You need to be 60 years old to access this type of payment, but from 6th April 2015 the age limit is dropping to 55 years old.
  • At least three quarters of the amount payable from both trivial commutation lump sums and small lump sums is subject to tax at your marginal rate.

How much can I contribute to my pension for the tax year starting 6th April 2015?

  • Pension contribution limits will remain at the current annual allowance of £40,000 from April 2015.
  • You’ll be able to take your 25% tax-free cash without your contribution allowance being reduced, as long as you take no additional income from your pension.
  • If you take the tax-free cash payment and an income your contribution allowance will be £10,000 each year (the £10,000 limit does not apply to any benefits you have in a final salary scheme).
  • If your pension fund is worth less than £10,000 and you take it as a small lump sum payment your  ontribution limit will not be reduced.

What rules will apply to Death Benefits?

  • From April 2015, if the person who dies is 75 or over, the person who receives the pension benefits will only pay their marginal tax rate on any income they take from the pension.
  • If they decide to take the benefits as a lump sum instead this will be taxed at 45% in 2015 and then at their marginal rate from 2016.
  • If the person who dies is under 75, the person who receives the pension benefits is able to take money from the pension, either as income or as a lump sum, without paying any tax provided it is put into the beneficiary’s name within two years.
  • The new rules allow you to nominate whoever you like to receive your pension following your death. They do not have to be dependent on you.
  • Additionally if you die before the age of 75 (after April 2015) with a joint life or guaranteed-term annuity you can pass that on tax-free. This will bring most annuities into line with Income Drawdown.

Understanding the Risks

We provide investment services on an execution only basis, which means we don't provide investment advice. This information is intended for educational purposes only and is not a solicitation or recommendation to make an investment based upon its content. All information is based on our understanding at the time.

Guidance Guarantee

Everyone that has a pension scheme (except those with a Final Salary pension only) will be entitled to access free, impartial guidance on their pension options, including the option of a face-to-face conversation about their options – provided by designated guidance providers such as the Pensions Advisory Service or the Citizens Advice Bureau.