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Options at retirement

Significant changes to pension regulations were introduced in April 2015 aimed at giving more choice and flexibility about how people can access their money purchase pension savings and including the payment of benefits on death. There are still some areas which have not been clarified but we have outlined here our understanding of these changes.

Because of the implications on benefits, tax planning and estate planning, we would strongly advise of the need to access professional advice before making any final decisions.

We believe there are five options available to you from reaching the age of 55 or earlier if you qualify for ill health retirement. These are

  • Do nothing and leave your pension fund invested.
  • Purchase an annuity with or without taking a 25% tax free lump sum.
  • Cash in the whole fund. 25% will be tax free and the remaining 75% will be added to your taxable income for that tax year and charged at your marginal rate of tax.
  • Take a 25% tax free lump sum and move the rest of the funds into a flexi-access drawdown arrangement. There are no restrictions on the amount or frequency of withdrawals that you can make from the flexi-access drawdown fund but on each occasion income tax will be payable on the withdrawals at your marginal rate of tax.
  • Transfer to an uncrystallised funds pension lump sum arrangement where you can choose to withdraw a lump sum from your accumulated pension fund whenever you wish. On each occasion, 25% of the withdrawal will be tax free and the remaining 75% will be taxable as pension income at the emergency rate of income tax.

Once a pension arrangement has been chosen then it may be possible make additional fund contributions going forward. A reduced money purchase annual allowance has been introduced which allows for contributions of up to £10,000pa once benefits have been flexibly accessed.

The new regulations also allow you on entering these arrangements to nominate beneficiaries who can receive benefits from the fund on your death. The beneficiary no longer has to be a dependant and can be anyone nominated by you. The beneficiaries nominated will “inherit” the remaining accumulated fund.

 If you die before age 75 any payments made to the beneficiaries will be paid tax free.

If you die after age 75 all benefit payments are subject to the beneficiary’s marginal rate of income tax. If the whole inherited fund is withdrawn in one lump sum, the tax payable will be 45% until the 2016/17 tax year.  This means that, subject to individual circumstances, it is likely to be preferable to commence retirement benefits by withdrawing the maximum tax free lump sum on reaching age 75 otherwise the whole of the remaining fund on death will be taxable. Beneficiaries can choose to receive their withdrawals from the inherited fund by way of annuity purchase or drawdown and if they die with unused inherited funds, these in turn can be passed to a nominated successor.

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The guidance and advice contained within this website is subject to the UK regulatory regime and is therefore restricted to consumers based in the UK.Sense Financial Solutions is authorised and regulated by the Financial Conduct Authority under Financial Services Register number 616273.Sense Financial Solutions Ltd is registered in England & Wales at Companies House, number 5313395.Registered Office: 43 Walcote Drive, West Bridgford, Nottingham, NG2 7JQ
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