City Trustees - part of Mattioli Woods

News and Media

25 June 2014

How has the budget affected flexible drawdown?

When it comes to financial planning, flexible drawdown has always been a tax-efficient way of taking income in retirement. Previously, it was suitable for clients who either had large pension funds or generous final salary arrangements. This was due to the fact that it was necessary to have a minimum secure income of £20,000 per annum from state pensions, lifetime annuities, or final salary arrangements.

From April 2015, there is likely to be no such minimum income requirement and many will access their pensions freely at a time when there are likely to be numerous authorised and non-authorised investment products coming onto the market. The Government has acknowledged that there will be much need for advice, which is a great opportunity for IFAs.

The new rules

Pension savers will be able to take all of their pension pot at any time after the age of 55. The ability to take 25% tax-free as a lump sum has not changed, but it is proposed that individuals will be able to access the entire remaining fund at marginal rates from April 2015. The remaining 75% will be considered as income for the tax year in which it is withdrawn. Previously, you could only draw an income based on the Government actuary department's (GAD) annuity rates. For a 55-year-old, this would currently be in the region of 4.8% of the fund, and when uplifted to 150%, would be 7.2%. Anything above this maximum pension is currently taxed as an unauthorised payment, at rate of 55%. Nothing will change in the way individuals can save in a pension, and clients will continue to receive immediate tax relief at the marginal rate on personal contributions, with higher-rate relief being reclaimed via their tax return. On company contributions, there will continue to be corporation tax relief.

Between now and the plans being implemented in April 2015, the government will cut the minimum income requirement for flexible drawdown from £20,000 to £12,000 and raised the capped drawdown limit from 120% to 150% of GAD. It will increase the size of a lump sum small pot from £2,000 to £10,000 and increase the overall size of pension saving that can be taken as a trivial commutation lump sum from £18,000 to £30,000.

The benefits of a pension scheme

Clients need to think twice before being targeted to cash in their pension to purchase a buy-to-let property or an unauthorised get-rich-quick investment scheme and consider the following ongoing tax advantages of a pension plan:

  • There is no capital gains tax on gains within a pension fund compared to holding investment outside of a pension
  • There is no income tax on investment returns within a pension fund compared with holding money in cash or income producing investments
  • There is a lot of flexibility in how clients can invest their pension assets, e.g. building society accounts, commercial property, shares/loans to third parties or the sponsoring company of the scheme
  • The increased flexibility in the accessibility of pension schemes coupled with the tax relief available, means that pensions should be one of the first ports of call for saving in the future alongside ISA's

City Trustees is a specialist pension provider committed and focused on the fully bespoke self-invested pension market, distributing its products exclusively via IFAs. City Trustees operates a free technical helpline for IFAs for support with pension challenges.

Tel: 0116 240 8731 or email: today.


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City Trustees is a trading name of Mattioli Woods plc. For news updates on the Group, please visit our central News & Media on the Group website.