Retirement

Flexible Access Pensions Explained

Flexible access pensions start from April 2015 – but what are they and how do you choose the best way to manage your pension?

The new rules mean from 55 years old retirement savers can withdraw as much of the direct contribution pension funds as they wish.

The good news for expats is these rules cover Qualifying Recognised Overseas Pension Scheme (QROPS) as well as standard onshore pensions.

Civil servants and public sector workers are outside the new rules and their pension arrangements remain the same.

The rules allow three main options for withdrawing pension cash, but although some providers may offer the whole range, others may not offer any.

The options

If you wish to take advantage of flexible access but you provider does not offer the service, you can switch your pension to a provider that does.

The three main options are:

  • Lifetime annuities – Despite issues over low rates of return from annuities in recent years, you can still invest in an annuity which pays a guaranteed income for life.
  • Flexi-access drawdown – Basically this is the right to use your pension fund like a bank savings account. You can withdraw as much of your fund as you wish at any time
  • Lump sum payment – You can take all your pension fund in one go – the jargon for this is ‘uncrystallised funds pension lump sum’ (UFPLS)

In each case, the first 25% of any withdrawal is tax free. Income tax is charged on the balance and the rate can vary depending on how much cash you take, if you have other income and where you live.

Taxing your pension

The tax rates in Britain are 20% up to £31,875 plus your personal tax-free allowance. The standard allowance is £10,600, so you can take £42,475 from a pension and remain in the basic rate tax threshold.

From £42,475 to £100,000, you will pay income tax on any pension withdrawal at 40%. Over £100,000, the tax rate rises to 45% and the tax-free personal allowance shrinks.

If you are tax resident outside the UK with a QROPS, the tax rules where you live will apply.

HM Revenue & Customs (HMRC) has warned some providers running flexible-access may apply an emergency tax coding to withdrawals, which will increase the amount of tax paid, however the overpayment can be reclaimed.

The government is running a free advice service to explain pension and investment options to retirement savers under the Pension Wise banner.

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