The National Careline
0800 0699 784

Tax Tips - March 2018

Pension Flexibility

Does this mean spending your pension on exercise classes?  No of course not!

From April 2015 new rules were brought in to allow you to access your pension pot[s] with much greater freedom than previously.  The new rules only apply to ‘defined contribution’ pensions and not to ‘defined benefits’ pensions [defined benefit pensions are often known as final salary schemes].  If you are not sure which you have, ask your pension provider.  They will also be able to explain what options they are offering.

With the new rules, people can still save into a pension scheme and then use it to buy an annuity, but if you are 55 or over you can now choose to take the money in other ways:-

The three main choices are:

  • To withdraw all of the money at once, including the tax free element
  • To take the tax free amount and a taxable monthly pension
  • To take smaller lump sums each year until the pot is empty

And choices for the way you take your 25% tax free cash:

  • You can still take the whole of the 25% tax free cash in one lump sum; or
  • Include a 25% tax free part in each individual lump sum you take, with the remaining 75% of the lump sum being taxable.

This sounds wonderful, but are there any pitfalls?

If you receive a means tested benefit [Pension Credit and Housing Benefit are typical examples] check whether your lump sum will affect that payment.  The Department for Work and Pensions (DWP) use what they call the ‘deprivation rule’ if you spend, transfer or give away any money that you take out of a pension pot, to decide if you have deliberately deprived yourself of that money. If they decide you have, you will be treated as still having that money and it will be taken into account when they work out your benefit entitlement.

You may also need to consider your financial future, because if you take the whole pension pot, there will be no regular pension payments for your retirement.  From April 2017 there is a Pension Advice Allowance.  This allows you to take out £500 tax free from your pension pot to pay for professional pension advice.  You can use this allowance three times in three separate years so advice can be paid for at different stages to suit your financial needs.  The pension provider pays this allowance directly to the professional adviser.

Will you want to save into a pension plan again?

If yes, you need to be aware of the money purchase annual allowance rules (MPAA). Put simply this means that once you have accessed a pension pot, the amount you can save in a pension plan and gain tax relief is reduced from that date onwards. For 2018/19 the figure is £4,000, quite easy to exceed if you are still working. These rules basically stop people using pension flexibility as a way to gain more tax relief than is intended by moving money around. As always the rules can be quite complex so, if you think you might be affected we recommend that you seek professional advice.

And for the big question – How much TAX will I pay on the taxable part of my pension lump sum and will this affect my other income and how it is taxed?

This can be quite complicated to understand, so next month we will explain the way the pension provider will tax your taxable lump sum[s] and how this is treated by Her Majesty’s Revenue & Customs.

For free pension advice you can contact Pension Wise, a government organisation on 0300 330 1001. You will either be offered a telephone appointment with The Pension Advisory Service or possibly a face to face appointment at a participating CAB.

This article is by Tax Help for Older People registered charity no 1102276 (Scotland no SC045819), offering free tax advice to older people on incomes below £20,000 a year. The Helpline number is 0845 601 3321 or geographical 01308 488066.