Since 2015 the way in which you can take your pension has changed. Whereas traditionally, pension holders would draw a 25% lump sum and receive a regular monthly income with the rest of the fund either via an annuity or income drawdown, the options have opened up significantly. You now have several methods of drawing your personal pension in retirement.
Uncrystallised Fund Pension Lump Sum (UFPLS)
Part of the biggest changes introduced in 2015 has been in relation to the way in which you can access your pension. As everybody’s circumstances are different at retirement, not all of us may need access to a large amount of capital / all of your 25% tax free cash entitlement.
An Uncrystallised Fund Pension Lump sum allows you to choose how to access your pension funds either to suit your tax status or to enable you to have access to all of your funds. For example, UFPLS can be used in the following ways:-
- If you want to deplete the whole of your pension, ‘cashing in’ your pension (i.e for smaller pots)
- If you want to access some of your money purchase pension without designating your entire fund to go into drawdown ie you require £10,000 from your £150,000 pension plan. You can receive £2,500 as a tax free lump sum, and £7500 as a taxable lump sum. This leaves the remaining £140,000 invested in a personal pension
- If you do not require a tax free lump sum in retirement. UFPLS is the favoured route for those of you who have sufficient savings and would prefer to maximise their income. For example, under the drawdown option you either withdraw your 25% tax free cash upfront, or draw a smaller amount / none and for-forfeit your right to having 25% of your pension as a tax free amount. With UFPLS, you are able to draw a regular income whereby 25% of the income is always tax free. Please see the following example:-
This is the now the most favoured route in retirement. Drawdown is a way of using your pension/s to provide you with a regular income by reinvesting the funds. Unlike a final salary pension or annuity, the personal pension converts to a drawdown plan and always retains a true value. The pension funds are invested appropriately, and you can draw as much as a little income from the plan. You are able to take 25% tax free cash at the outset, and the remaining funds will be used to provide you with an income.
Any income taken is drawn directly from your pension. If you make withdrawals that are not matched by fund growth, the fund will go down in value.
John is 60 and has a pension fund of £200,000. He has savings of £100,000 and he has no debts. John will be working part time and earning £15,000 a year. In order to maximise his income, he does not want an upfront capital lump sum. We would therefore recommend the UFPLS route:-
- John chooses to take a 5% income.
- £10,000 per annum paid monthly (£833).
- Tax treatment of Income – £208 is tax free
- £625 taxed at 20%
John will therefore receive monthly income of £708.
If you have a pension plan worth £100,000 at retirement, drawdown could look like this:-
- £100,000 pension value
- £25,000 tax free cash leaving
- £75,000 invested in the drawdown plan. As an indication, 5% withdrawals would provide you with £3750 per annum.
Annuities are a way that you can protect your lifestyle after you retire, no matter how long you live. An annuity converts a lump sum, which is usually a retirement fund or pension lump sum, into a regular guaranteed retirement income that will last for the rest of your life and can continue being paid to a spouse or into your estate.
The income from annuity is taxable and the amount that you get each year will depend on the size of your initial annuity lump sum. It will also vary according to government bond yields at the time you purchase the annuity, your gender, age and health, and the type of annuity that you opt for.
If you need professional retirement advice with fully independent financial advisors in Stoke on Trent, then please don’t hesitate to contact a member of our team today. We offer free initial consultations and pride ourselves on delivering a personal tailored service.