The new pension rules allow for a variety of ways to take a lump sum from your pension fund. Each has different tax consequences. What factors should you consider before taking your money?
Our recent article about the new uncrystallised fund pension lump sums (UFPLS) ( yr. 15, iss.5, pg.1 , see The next step ) gave the impression that they would replace pension commencement lump sums (PCLS). That?s not the case and so to set the record straight we?ve explained in a little more detail the options available from 5 April 2015.
Lump sum options
The post-5 April 2015 options and the key tax consequences of each are:
Option 1. Withdraw the whole of your fund:
75% will be taxable as income, which means depending on how large your fund is and how much other income you have, a large chunk could go in tax at the 40% and 45% rates
income or gains you make from the money after withdrawing it, e.g. interest, dividends etc. will be taxed in the usual way
whatever?s left after income tax will be part of your estate for IHT purposes.
Option 2. Use a UFPLS and withdraw as much or as as little as you want with the option to take more lump sums when you want.
75% will be taxable as income
the balance of the money will remain in your pension fund and any income or gains generated by it is tax exempt
the money left in the fund will be outside your estate for IHT purposes.
Tip 1. UFPLS allow you to manage lump sums tax efficiently. For example, if your business had a poor year and you knew your income was going to be less than the basic rate band you take a UFPLS to make use of the basic rate band.
Tip 2. UFPLS will be available from pension funds which, because of their rules, don?t currently offer an income drawdown option. That is, taking regular money as income from your fund without buying a pension.
Option 3. Take the pension commencement lump sum, which can be up to 25% of your fund:
it will all be tax free; anything you draw after that will be taxable as income
the balance of the fund will remain in your pension fund and any income and gains generated by it are tax exempt
the money left in the fund will be outside your estate for IHT purposes, but depending on how the remaining money is taken a special tax charge could apply (see The next step ).
More than one fund
The lump sum options apply to each pension plan. So if you have two or three you could use different options for each. This potentially creates even greater flexibility and tax efficiency.
Get the right advice
After 5 April 2015 you?ll be entitled to free financial advice about your pension under a government scheme (see The next step ). It?s certainly worth considering. However, as we?ve said before, if you?re 55 or going to be by 5 April we recommend consulting a financial advisor before then.