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April 2015 brings new opportunities for those who’ve retired or are thinking of doing so, following ‘the most radical changes to pensions in almost a century’*. It’s your retirement and you get to choose how and when you spend your money, with far greater flexibility and choice than has existed until now.

This does come with responsibility though. One of our main roles as financial planners is to ensure that clients never have the fear of running out of money when considering their retirement planning. Exhausting a pension fund can leave you with nothing to fall back on, and possibly becoming reliant on state benefits. Early retirement  at age 55, could mean that you mightl need an income or financial support for over 30 years. It is a big consideration.

However, the idea of withdrawing some or all of a pension fund, to have access to capital could be an attractive one. In many cases it could bring the financial freedom to allow dreams to be realised. But with the value being reduced by taxation and as the average pension fund on retirement is only around £30,000, will the cash realised really be sufficient, and what happens when it disappears?

From April 2015 many pension arrangements will give access to the following benefit options, offering members the widest choice of options available when taking their benefits, and allowing members to phase their retirement income to suit their own circumstances and financial needs.

Uncrystallised funds pension lump sum
This is when an individual crystallises all or part of their funds for immediate payment. 25% of the uncrystallised funds pension lump sum is paid tax-free, with the remainder treated as earned income and liable to income tax. A money purchase annual allowance test is triggered when taking benefits this way.

Pension commencement lump sum
The maximum tax-free lump sum that can be taken is usually 25% of the crystallised fund, used to provide pension benefits, up to the lifetime allowance. For the 2015/16 tax year, the maximum tax-free lump sum that can be taken is £312,500. However, individuals may be entitled to more than this amount if either lump sum, fixed, or individual protection has already been obtained.

Flexi-access drawdown
Flexi-access drawdown offers flexibility in the way that pension income is taken. Income can be withdrawn as a whole, as smaller lump sums or as a series of regular payments and does not limit an individual to a set amount of pension income. However, following receipt of income, the new money purchase annual allowance test will be triggered. As pension income is subject to income tax, the flexibility of flexi-access drawdown offers tax planning opportunities.

Lifetime Annuities
Lifetime annuities remain an option after 5 April 2015. They have the potential to become more flexible, as annuities will no longer be restricted to a maximum guarantee period of ten years, and payments will be allowed to decrease as well as increase. Innovations in the annuity market are expected.

Capped drawdown
Up to 5 April 2015, income can be taken from a pension fund as capped drawdown. Under capped drawdown, pension payments are limited to an amount roughly equivalent to 150% of an annuity payment, and have to be regularly reviewed to ensure they do not exceed the permitted maximum. If an individual is already taking capped drawdown income they can continue to do so. Alternatively, individuals can convert capped drawdown funds into flexi-access drawdown, which will mean their income will not be subject to the capped drawdown limits and review requirements, but a money purchase annual allowance test will be triggered. For individuals considering crystallising some benefits as capped drawdown prior to 6 April 2015, there may be an opportunity to retain the higher annual allowance limit of £40,000.

The new retirement flexibility does mean that phasing your retirement over a period of time has become easier but good,financial planning for retirement is now needed more than ever, to maximise ongoing financial security and tax efficiency when drawing benefits. It is vital that individuals seek advice from a suitably qualified professional before taking benefits, as the choices they make will affect both their retirement income and the level of contributions they can make to a pension scheme in the future. Retaining a pension fund in a tax-efficient environment and ensuring future financial security is key.

With the removal of the 55% tax charge on lump sum death benefits from April 2015, the flexibility of member-directed pension schemes, such as SSASs, SIPPs and Family SIPPs can also influence wealth planning decisions by allowing individuals to retain their pension wealth for future generations.

* Chancellor of the Exchequer George Osborne. HM Treasury, 21 July 2014

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