With a continual stream of negativity surrounding pensions, and recent legislation only limiting what a government clearly sees as already generous tax-relief concessions, many pension holders would be forgiven for missing several positive changes that will allow those aged over 55 to gain more control and flexibility over when and how they use their retirement savings.
First is the removal of the ‘age 75’ rule that effectively obliged anyone with private pension savings to use them to buy an annuity by this date. This means that pensions can now be left invested for longer with little disadvantage. Even tax free cash which previously had to be taken or lost by age 75, can now be deferred.
Secondly, for those that meet certain eligibility criteria, plan holders can now take an unlimited lump sum from a drawdown pension arrangement, without the maximum income restrictions that apply to conventional drawdown arrangements. Income tax is payable at the member’s marginal rate of tax, so those interested in doing this may well wish to stagger withdrawals over several tax years. To be eligible for flexible drawdown, individuals must show that they already have ‘secure pension income’ of £20,000 or more, per annum. This could be made up of annuity, defined benefit pension and/or income from scheme pension. Income from a drawdown pension arrangement, as not guaranteed, cannot be used.
Flexible drawdown could, for example, be used to meet one-off large expenditure items as they arise or to optimise tax liabilities. It can be a way to pass money through the generations, either by ‘gifting’ regular payments, for example into trusts, or as pension contributions to children using ‘normal expenditure’ rules so as to help avoid inheritance tax. In moving money out of a pension fund before death, the pension holder will be paying income tax on such payments at a lower rate than the hefty 55% tax charge payable on a lump sum payment form the pension fund on death.
The increased tax charge on death to 55% on all crystallised pension benefits, or all benefits post 75 from drawdown pension, replaces the previous 35% before the age of 75 and up to 82% on death afterwards.
These changes were not widely publicised at the time, but provide huge planning opportunities for those with larger, flexible pension arrangements. Moving forward there is a strong argument, where available, for these individuals to strategically withdraw lump sums from their pension arrangements to reduce the ultimate tax charge on death.