In April 2015 new rules will allow anyone 55 and over to draw the whole of their pension fund in one lump sum. Until then stop-gap measures apply. Can you take advantage, and what’s the tax position?
The big news on pensions in Budget 2014 was that from April 2015 those who have invested in pension schemes will be free to withdraw their savings in one go as soon as they hit 55. Naturally, there are tax consequences.
Pension lump sums from April 2015
Where you choose to take part or all of your fund you’ll be entitled to a tax-free pension commencement lump sum. This is limited to a maximum of 25% of your fund value. Anything you draw in excess of that will count as taxable income. Where this would push you from a basic to a higher rate taxpayer, the sensible plan will be to spread your withdrawals over a number of years so that you stay within the lower tax bands.
While the small print is being sorted out on the new rules, the government has relaxed the existing ones to allow greater access to pension savings, but only for those who are 60 or over. If that’s you then it will interest you to read that since 27 March 2014, and subject to conditions specific to the types of scheme you have (see The next step ), it’s been possible to withdraw all your pension savings where:
a pension fund value is no more than £10,000. You can withdraw all your cash from up to three pension schemes this way, even where you have other pension schemes you don’t cash in.
the value of all your pension funds together add up to no more than £30,000, even if one or more of them are worth more than £10,000. This is known as trivial commutation.
In each case 25% of your pension funds can be taken tax free. The balance is taxable income.
Take the money or stay put?
An important question for those who reach 60 between now and April 2015 is whether, assuming you meet the conditions, you should cash in your pensions or wait. It’s mainly a matter of choice according to your personal needs and wishes. However, there are a two tips we can offer that might help you decide.
Tip 1. From April 2015 the government will offer anyone with pension savings free and impartial guidance on how to get the best from their funds. The bad news is that it will only be given at the time you retire. If you’re still in work and need personalised pensions advice then your best option is to contact a financial advisor. While there’s stacks of advice online, pension planning is a specialist area and an expert will usually be worth paying for.
Tip 2. Pension recycling is still possible. This means taking your pension savings and reinvesting up to the maximum allowed (£18,000) into a new pension scheme. The advantage of recycling is that you’ll get tax relief on the money you reinvest. For example, a reinvestment of £14,400 will, after basic rate tax relief, give you a pension fund of £18,000. And when the new rules take effect in 2015 you can withdraw all of it, 25% of which will be tax free. Even after deducting pension fund charges that will give you a very decent return on the reinvestment.
If you reach 60 between now and April 2015 you can withdraw your pension funds in full with 25% being tax free. This can be done for up to three funds where they are worth no more than £10,000 each, or where all your funds together add up to £30,000 or less.