Post-retirement Planning | LR Financial Services Post Retirment Planning

Once you have attained the age where you have decided that you are going to retire or semi-retire from work and use your pension and possibly your savings/investments to provide an income, you will need to work out exactly how much income you will need.

Previously, the only choice you had was to sell your pension fund and buy an Annuity (an income for life). The income you received was based on your age, how big your pension fund was, the interest rates available at the time, your health, whether you were a smoker or not and how you wanted your income to be paid; level or increasing, in advance or in arrears, monthly, quarterly or annually, for yourself or with a widow’s/widower’s pension – and there were several other decisions which had to be made at the time. Then, if your circumstances were to change, you could not alter the choices made! The income obtained was treated as earned income and taxable at your highest marginal rate.

Now, however, there is no requirement for you to buy an Annuity. You can leave your pension fund invested and once you have reached the minimum age requirement (55), or at any time thereafter, you can take an income directly from your fund, this is sometimes known as “Drawdown” or “Income Drawdown”.

Normally, you can withdraw up to 25% of the value of your fund free from income and capital gains tax, then you can choose to take no income, or any amount from £1.00 up to the remaining value of your fund. However, any amount in excess of this will taxed at your highest marginal rate, which is normally deducted by the provider and paid directly to Her Majesty’s Revenue & Customs (HMRC). Please be aware that taking your whole fund in one amount could give rise to a large amount of income tax being deducted. This is due to the way HMRC calculate the tax due under Pay As You Earn (P.A.Y.E.) so it is advisable to take advice before doing so.

Tax rules depend on individual circumstances and may change. We recommend you get professional advice if you need more information on tax.

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What is Income Drawdown?

An Income Drawdown plan is a pension plan that allows the plan holder to have the ability to take all or some of their retirement savings as an income directly from the plan and/or a cash lump sum, free of income and capital gains tax, and is sometimes referred to as the “Tax-Free Cash Lump Sum” (TFCLS), subject to HMRC limits at any time after age 55 (this sentence is too long but I am not sure how to break it up to ensure it is still accurate..). You don’t need to use all your retirement savings and you decide how much tax-free cash and/or income you need and when you need it.

How does Income Drawdown work?

You can use your whole Income Drawdown plan for income, but if you do then you will only have an Income Account. Alternatively, you can split an Income Drawdown plan into two parts. The first part is similar to a pension plan – you can continue to make contributions if you wish to do so and this is sometimes known as the Savings Account. Monies held in the Savings Account are called Un-Crystallised Funds. The second part, sometimes known as the Income Account, receives transfers of capital (Un-Crystallised Funds) from the Savings Account. These funds, which are then used to pay any Tax-Free Cash Lump Sums and/or income, are then are called Crystallised Funds. You won’t have a Savings Account unless you make additional contributions to your plan and it is not possible to move money from the Income Account back to your Savings Account.

How can I take my money out of an Income Drawdown plan?

You can withdraw all or some of your retirement savings, but the maximum that can be taken as a Tax-Free cash Lump Sum is usually 25% of the total fund value. The funds can be withdrawn as Tax-Free Cash Lump Sum payments, either regularly or as single payments, regular taxable income payments or as a one-off taxable income payment or as a combination of Tax-Free Cash Lump Sums and taxable income payments. Any payments which include a Tax-Free Cash Lump Sum can be paid either monthly or yearly, and they’ll be paid until you use up all of your Tax-Free Cash Lump Sum. Once you’ve used up all of your tax-free savings, any future payments receive will be treated as income payments. Regular tax-free cash, and combined regular tax-free cash and taxable income payments, can be stopped or started at any point in your plan. Income payments can be paid monthly, quarterly, half-yearly, yearly or on a one-off basis, and will be taxable. Whilst the income payments aren’t guaranteed for the rest of your  life, you do have the flexibility to increase or reduce your income. You can also change the frequency of your income payments. When you access all or part of your retirement savings it’s important that you think about your needs in both the early and later parts of your retirement. It is your responsibility to ensure your income will last the rest of your life. You can change your mind at any time and choose to buy a secure income.

I already have an Income Drawdown Plan – can I move it to another provider?

If you’re currently receiving an income from another Income Drawdown plan, it may be possible for you to transfer the value of that plan to another Income Drawdown provider and continue taking an income from it. If you decide to transfer an existing plan or already have transferred a plan into another plan, the maximum income you can take from this transfer may be capped. This will be determined by rates produced by the Government Actuary’s Department (GAD). You’re not restricted to this limit and if you take an income higher than the capped amount, your plan will become a Flexi-Access Drawdown Plan and the Money Purchase Annual Allowance (MPAA) will apply to you. If your income is currently capped at the GAD rate, the new provider will recalculate the maximum level of income you can receive at least every three years until age 75 and then every year after that. Following these reviews, you may decide to increase/decrease the level of income you receive.

I’m currently taking benefits from my plan - can I still contribute as much as I like?

If you want to continue making contributions to your plan while or after you’ve taken all or some of your retirement savings you may be limited to what you can contribute and receive tax relief on. This is known as the Money Purchase Annual Allowance (MPAA). Please note that this is considerably lower than the Annual Allowance and relates to any pension plan you may have into which you are making contributions – not just the one you have or are taking  benefits from.

If I use an Income Drawdown plan for my income, will my investment funds still be tax-free?

Pension investment funds are generally free of UK income and capital gains tax. However, they cannot reclaim tax deducted at source from the dividends of UK company shares. Also, there are limits on the amount you can invest in pension plans and on the maximum value of retirement savings that you can accumulate without being subject to a tax charge. These limits are known as the Annual Allowance and the Lifetime Allowance.

Is Income Drawdown suitable for everyone?

No, there are alternative products available on the market and you seek independent financial  advice to help you shop around to find the best product for you. Alternatively, you can speak to Pension Wise and get generic guidance, rather than specific advice, on the options available.

What is the Annual Allowance?

By law, there is a maximum total amount that you can pay in to all pension plans in your name each tax year that will be eligible for tax relief. This maximum is called the Annual Allowance and is £40,000 from the 2016/17 tax year onwards. This amount includes contributions made by you and by anyone else into your plan, for example, your employer. If total contributions exceed this limit in any year, then a tax charge will be payable on the excess, at your marginal rate.

What is the Money Purchase Annual Allowance?

If you’ve taken certain types of pension benefits, you’ll have a reduced Money Purchase Annual Allowance (MPAA) of £4,000. Your overall annual allowance will still be £40,000, but your annual allowance for all money purchase plans (such as this one) will be £4,000. You’ll have this lower Annual Allowance if you have; taken an Uncrystallised Funds Pension Lump Sum (UFPLS); taken any income payment using Flexi-access Drawdown, or taken a lump sum, over and above your entitlement to a tax-free cash lump sum; taken Capped Drawdown income above the maximum income limit at any time after 5 April 2015 and/or had Flexible   

Drawdown funds that are converted to Flexi-access Drawdown on or after 6 April 2015. This isn’t a full list. You should speak to your independent financial adviser if you’re unsure what level of Annual Allowance applies to you. If the £4,000 limit applies to you, you won’t be able to carry forward any unused Annual Allowance from previous years.

What happens to my pension fund when I pass away?

If you die before age 75, the remaining value of your Income Drawdown plan can be paid to the individuals you nominated such as your spouse, civil partner or even to your children or grandchildren on your death (subject to the provider’s terms and conditions). The nominated beneficiaries will have three options; they can leave the benefits invested and take an income, should they so wish, purchase a secure income by way of an annuity or take the remaining value of the plan as a cash lump sum, free of income and capital gains tax. If you die after age 75 and you were using Income Drawdown, the remaining value of your invested plan will be paid to your nominated beneficiaries (subject to the provider’s terms and conditions). The beneficiaries will have three options; again, they can leave the benefits invested and take an income if they so wish, purchase a secure income by way of an annuity or take the remaining value of the plan as a cash lump sum; this will be added to the individual’s taxable income and taxed at the individual’s highest marginal rate.

If I am drawing an income from my fund, where’s my money invested?

Depending on the type of Income Drawdown plan you have chosen your money can be invested in a number of different funds. You can choose one of three fund options. Each of these invests in a mix of assets including stocks and shares, commercial property, fixed interest investments (both government and corporate bonds) and some cash. When you purchased your Income Drawdown plan, you should have received a Key Features Document which should explain the different assets you can invest in and other useful information to help you understand how your provider manages your investment. We strongly recommend you take a few minutes to read it.

Can I transfer funds into this drawdown plan from other pension providers?

Yes, you can transfer your existing pension plans into this one. However, any transfer must come from another UK Registered Pension Scheme or a Qualifying Recognised Overseas Pension Scheme. If you are considering transferring your pension from another scheme, and you know that you are in serious ill health when you do so, should you die within two years of the transfer this amount could become liable to inheritance tax. You should, therefore, ensure that you have fully considered your options and the differences between the two plans before making any transfers. For example, plan charges, they may be greater in the existing plan or the transfer value may be lower than the fund value. Also, there is no guarantee that the plan you transfer in to will perform better than your existing plan. If you’re unsure whether you should transfer your existing pension:

Please contact LR Connections on 0345 314 8972 for an appointment to discuss how we could help you.

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