Neil Gardner The Pension Changes of 2015

01/05/2023 Neil Gardner BA Hons MA PGCE 1

The Pension Changes of 2015

Neil Gardner BA Hons, MA, PGCE


Access to your savings

• From 6th April 2015, from age 55, you can access as much of your savings from your defined contributions pension scheme (more commonly known as ‘money purchase schemes’) as you want under new ‘pensions flexibility’ rules.

• However, schemes don’t have to offer these options.


Access to your savings• You can transfer your pension savings to a pension provider

that offers the option that you want to use from 6th April 2015, from age 55.

• You can access your benefits in a number of different ways such as:

• Lump sum payment• You can take money direct from your pension pot without

having to buy an annuity or put money into drawdown, and 25% of this sum will be tax free.


Lump sum payment

• This is known as an uncrystallised funds pension lump sum (UFPLS). You can take one or more UFPLS payments and these can be regular or irregular payments.

• If you receive a UFPLS and this is the first time you have used the pension flexibility rules to access your pension savings, your scheme administrator will provide you with a flexible access statement.


Lifetime annuity• You can use some or all of your fund to buy an

annuity that will be payable at least for the rest of your life.

• You can take a tax free lump sum of up to 25% of your pension pot when you buy an annuity, called a pension commencement lump sum.


Flexi-access drawdown• You can put funds into drawdown. From 6th April

2015 there are no limits on how much or how little you can take from your drawdown fund each year.

• You can take a tax free pension commencement lump sum of up to 25% of your pension pot when you put funds into drawdown. Any drawdown payments are taxed as income.


Flexi-access drawdown• If you receive a flexi-access drawdown

payment and this is the first time you have used the pension flexibility rules to access your pension savings, your scheme administrator will provide you with a flexible access statement.


Capped Drawdown• You can continue in capped drawdown if you were in a

scheme before the changes, but no new capped drawdown funds or flexible drawdown funds may be set up from 6th April 2015 onwards.

• If you are in capped drawdown you may either convert your fund into a flexi-access drawdown fund or continue to take a capped drawdown pension from your arrangement. Speak to your pension scheme administrator if you want to convert to flexi-access drawdown.


Capped drawdown• You can add additional funds to your existing

capped drawdown arrangements and your existing annual pension limits and review periods for capped drawdown will continue to apply.

• Capped drawdown payments are taxed as income.


Short term annuities• If you are in drawdown you can decide to

receive benefits in drawdown by purchasing short term annuities.

• These are paid by insurance companies at least annually and for no more than 5 years.


Tax on payments and contributions

• All payments you receive from an annuity or drawdown are taxable as income.

• You also pay income tax on 75% of the amount of any UFPLS you receive.

• The amount of tax you pay will depend on the amount of payments that you receive in the tax year plus any other taxable income you have.


Summary: options for using your pensions pot

• Following the changes introduced in April 2015 people now have more choice and flexibility than ever before over how and when they can take money from their pension pot.

• You must have reached normal minimum pension age to access your pension pot, currently age 55 (or earlier if you’re in ill health or if you have a protected retirement age).


Summary: new pension freedoms• Changes introduced from 6th April 2015 give you freedom

over how you can use your pension pot(s) if you’re age 55 or over and have a pension based on how much has been paid into your pot (a defined contribution scheme).

• Whether you plan to retire fully, to cut back your hours gradually or to carry on working longer, you can now tailor when and how you use your pension and when you stop saving into it, to fit with your particular retirement plan.


Summary: what is a pension pot?

• ‘Pension pot’ refers to a type of pension you build up with pension contributions you and/or your employer make. You’ll have one if you have a defined contribution pension which includes workplace, personal and stakeholder pension schemes.

• Under the new flexible rules you can mix and match your options, using different parts of one pension pot or using separate or combined pots.


Options: leave your pension pot untouched

• You may be able to delay taking your pension until a later date. Your pot then continues to grow tax-free, potentially providing more income once you access it.

• Option: use your pot to buy a guaranteed income for life – an annuity

• You can choose to take up to a quarter (25%) of your pot as a one-off tax-free lump sum then convert the rest into taxable income for life (an annuity).


Option: use your pot to provide a flexible retirement income (flexi-access drawdown)

• With this option you can take up to 25% of your pension pot or of the amount you allocate for drawdown as a tax-free lump sum, then re-invest the rest into funds designed to provide you with a regular taxable income.

• You set the income you want, though this may be adjusted periodically depending on the performance of your investments. Unlike a lifetime annuity your income isn’t guaranteed for life, so you need to manage your investments carefully.


Options: take small cash sums from your pot

• You can use your existing pension pot to take cash as and when you need it and leave the rest untouched where it can continue to grow tax-free.

• For each cash withdrawal the first 25% is tax-free and the rest counts as taxable income.

• There may be charges each time you make a cash withdrawal and/or limits on how many withdrawals you can make each year.


Option: take small cash sums from your pot

• With this option your pension pot isn’t re-invested into new funds specifically chosen to pay you a regular income and it won’t provide for a dependent after you die. There are also tax implications to consider.


Option: take your whole pot as cash

• You could close your pension pot and take the whole amount as cash in one go if you wish. The first 25% will be tax-free and the rest will be taxed at your highest tax rate, by adding it to the rest of your income.

• There are many risks associated with cashing in your whole pot. For example, it’s highly likely that you’ll be landed with a large tax bill, it won’t pay you or any dependent a regular income and, without careful planning, you could run out of money and have nothing to live on in retirement. Be sure to get financial advice before cashing in your whole pot.


Mixing your options• You don’t have to choose one option when deciding

how to access your pension, you can mix and match as you like, and take cash and income at different times to suit your needs. You can also keep saving into a pension if you wish, and get tax relief up to age 75.

• Which option or combination is right for you will depend on:

• When you stop or reduce your work


Mixing your options• Which option or combination is right for you will depend on:• • Your income objectives and attitude to risk

• Your age and health

• The size of your pension pot and other savings

• Any pension or other savings your spouse or partner has, if relevant


Mixing your options

• Which option or combination is right for you will depend on:

• • Whether you have financial dependants

• Whether your circumstances are likely to change in the future


Conclusion: what is the main change of the new pension changes of April 2015?• Savers have always had the freedom to take 25% of

their pension in a tax-free lump sum, but have then been herded into buying an annuity with all of the rest of the money.

• But from 6th April 2015, savers over the age of 55 have been given the option of taking a number of smaller lump sums, instead of one single big lump sum, and in each case, 25% of the sum will be tax-free.


Conclusion: what is the main change of the new pension changes of April 2015?• The main beneficiaries of the new pension freedoms are

those who have built up relatively large pension pots, who will be using the new freedoms to avoid paying 40% tax when they draw it down under the new freedoms.

• For example, if you have a £200,000 pot, you could cash it in from April 2015 and have £50,000 tax-free, but the remaining £150,000 would be liable for tax. This means that, depending on the individual’s personal allowance and other earnings, a lot of it will be swallowed up by 40% tax, as much as £53,600.


Conclusion: what is the main change of the new pension changes of April 2015?• But if the person decides to take the pension

instead as £50,000 each year for four years, then each year he/she will receive £12,500 tax-free and be liable for income tax only on the remaining £37,500, which could be as low as £5,500. So instead of paying more than £50,000 in tax, the person pays around £22,000.

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Neil Gardner The Pension Changes of 2015