Non-working individuals can invest up to £3,600 in a pension each year, but because of the tax relief this will only cost £2,880. Adults can also make such payments for children.
People who have taxable income in excess of £100,000 have their personal annual tax allowance reduced at a rate of £1 for every £2 of income over this threshold. This effectively results in the creation of a 60 per cent tax band for those with income between £100,000 and £112,950. This can be avoided if sufficient pension contributions can be made to bring income below the £100,000 threshold.
Currently 25 per cent of your pension fund can be taken as a lump sum.
Flexible drawdown
Flexible drawdown provides some individuals with the opportunity to withdraw as little or as much income from their pension fund, as they choose and as and when they need it. To be eligible for flexible drawdown, you must have secure pension income of at least £20,000 per year, in additional to your drawdown plan.
This Minimum Income Requirement (MIR) is considered a safety net to prevent retirees draining their funds. The minimum age at which flexible drawdown can be taken is 55.
Income from registered pension schemes counts towards the MIR; including lifetime annuities, occupational pensions, or the state pension. But income from pension schemes with fewer than 20 members, typically Small Self-Administered Schemes, will not count. You must also be already receiving the income for it to be counted – it cannot be based on future income.
For tax purposes the usual tax-free lump sum is allowed, but any other withdrawals will be taxed as income in the tax year that they are paid. A 55 per cent tax charge will apply to lump sum death benefits. Previously, the tax on crystallised funds was 35 per cent, or 82 per cent post age 75.
In the year of commencing flexible drawdown, no contributions can be made to a defined-contribution pension scheme and you must also stop being an active member of any defined-benefit scheme.
Whilst flexible drawdown is available to any individual who meets the minimum income and age requirements, it may be of particular interest to higher rate tax payers who believe they will meet the MIR at retirement but will become basic rate tax payers later.
As it currently stands, these individuals would be able to withdraw surplus funds up to the higher rate tax bracket per annum and would therefore benefit from the differential between the two tax brackets; having paid into their pension as a higher rate tax payer whilst employed to then withdraw the money as a basic rate tax payer after retirement.
Annuities
Whenever you decide to start receiving your pension benefits, you will normally need to buy a pension annuity in order to turn your pension fund(s) into a regular income for life.
You don’t necessarily have to retire before buying your annuity; it will depend on your individual circumstances. Buying a pension annuity is an important one-off decision; as once you’ve bought your annuity you will only have a short period of time to change your mind.
The government introduced legislation in the 2011 Budget to remove the pension tax rules forcing all members of registered pension schemes to secure an income, usually through buying an annuity, by the age of 75.
An annuity provides you with a guaranteed income for life when you retire. You buy an annuity using a lump sum from your pension or, perhaps, some savings. You can buy your annuity from any provider and it certainly doesn’t have to be with the company you had your pension plan with.
The amount of income you will receive from your annuity will vary between different insurance companies so it’s important to obtain comparisons before making your decision.
Current UK pension legislation allows you to start taking your pension benefits from age 55. Before buying your pension annuity, you will normally be entitled to take up to 25 per cent of your pension fund(s) as a tax-free cash sum. The remainder of your fund is then used to buy your annuity. Alternatively, you can use your entire pension fund to buy your annuity.
The amount of income you’ll be offered will largely depend on the following factors:
the size of your pension fund
annuity rates and market conditions when you buy
your age, sex and postcode, (if provided)
the annuity options you choose
the state of your health and certain lifestyle choices.
Your annuity income will be subject to income tax and will depend on your individual circumstances.
Changes brought in on 6 April 2011 resulted in significant changes in allowable pension contribution levels
The Annual Allowance limit for tax relieved pension contributions reduced to £50,000 per tax year, down from the previous level of £255,000 per tax year (2010/11), with the Lifetime Allowance set to reduce after 6 April 2012 from £1.8 million to £1.5 million.
Two measures introduced:
Carry Forward of unused reliefs – Under certain circumstances, it is possible to exceed the £50,000 annual allowance and receive tax relief on the excess. If you have contributed less than £50,000 (to all UK pension arrangements) in any of the previous three tax years it is possible to carry forward the level of the unused relief to the current tax year. As this is a potentially complex area, advice should be sought.
Fixed Protection – Prior to 6 April 2012 it is possible to register for fixed protection and maintain a Personal Lifetime Allowance of £1.8 million when it reduces to £1.5 million. However, this protection is only valid so long as further contributions, or benefit accrual, to pensions cease. As this may have implications for active occupational Defined Benefit and Defined Contribution scheme members, it is imperative that advice is sought.
