April 6th Flexible Pension Access Reforms.

As of April 6, sweeping reforms came into effect by way of a raft of new flexible access pension rules for UK adults aged 55 and over.

The measures have been implemented as a means by which to give retiring adults or those close to retirement age much greater control of how their pension pot can be accessed. This includes changes to the rules for those looking to access their entire SIPP, or choosing to take their pension as a gradual income source during retirement.

Three Basic Options.

The new pension rules as of April 6 give pension investors aged at least 55 greater freedom of choice with their respective pension benefits than ever before.

The three basic pension options are as follows:

1. Choose a regular, on-going source of income by way of income drawdown or an annuity.

2. Access the pension pot as and when needed to take out small lump sums.

3. Take out the whole pension pot all at once.

Lump Sum Payment.

For those choosing to take lump sums from their pension pot without transferring the money to a drawdown account or buying an annuity, 25% of the funds will be free of taxation. This is what the government refers to as an ‘uncrystallised funds pension lump sum’ (UFPLS). Pension holders will have the option of taking out any number of UFPLS payments on a regular or irregular basis.

Lifetime Annuity.

Another option is to use a proportion or the whole pension pot to purchase a lifetime annuity. When doing so, it’s possible to take 25% of the pension pot out tax-free while using the rest to buy the annuity.

Flexi-Access Drawdown.

As of April 6, limits were lifted as to how much a pension holder may take out of a drawdown – how little or how much you take is now totally up to you. As is the case with the lifetime annuity, up to 25% of the pension pot can be taken tax-free as a lump sum payment, with some or all of the remaining funds being put into drawdown. Payments received from drawdown accounts are subject to standard income taxation.

Capped Drawdown.

April 6 2015 represented the cut-off point for all new capped drawdown funds to be set up in the UK. However, if you already had a capped drawdown account set up prior to the changes in April, the scheme can be continued as before the implementation of the changes. Capped drawdown accounts offer the option of remaining capped or being transferred to a flexi-access drawdown fund. Speak to a qualified financial adviser for guidance on making the best decision for your own pension funds.

Tax on Payments and Contributions.

All drawdown and annuity payments are subject to income tax at the appropriate rates. How much tax you can expect to pay will be calculated in accordance with the payments you received in conjunction with all other income of a taxable nature. Taxation will also apply to pension pot contributions over and above the set annual tax-free allowance.