TECHTALK
This article originally appeared in APR 15 edition of techtalk. Please visit www.scottishwidows.co.uk/techtalk for the latest issue.
FLEXI-ACCESS DRAWDOWN AND
UNCRYSTALLISED FUNDS PENSION
LUMP SUMS EXPLAINED
Chris Jones
The new pensions Freedom and Choice reforms are now in force bringing two new ways
for your clients to take money from their pension fund flexibly. Here we look at how each
of them works.
FLEXI-ACCESS DRAWDOWN (FAD)
Flexi-access drawdown replaces capped drawdown which
FAD AND THE MONEY PURCHASE
ANNUAL ALLOWANCE (MPAA)
will no longer be available for new arrangements. All new
If a member simply designates into FAD and takes the tax free
drawdown arrangements set up from 6 April 2015 will be FAD.
cash then they keep the standard £40,000 annual allowance.
At any time from a client’s minimum retirement date (normally
55) onwards they can choose to move some or all of their
pension fund into FAD.
However, as soon as they take any income from the drawdown
fund the money purchase annual allowance will apply. This
restricts future tax relievable money purchase contributions
to £10,000 a year. Carry forward is not available with the MPAA.
Normally 25% of the amount can be taken as tax free cash.
The rest remains invested in a drawdown plan. Clients can
then take as much or as little income from the fund as they
The normal annual allowance and carry forward rules remain
available for defined benefit accrual.
choose. They can choose to take nothing at all or the entire
FAD AND DEATH BENEFITS
fund in one go. Any income payments will be subject to
If your client dies before age 75, any funds can be paid to
income tax and taxed at their marginal rate (s).
their nominated beneficiary free of tax whether it is paid as a
lump sum or income. If they die aged 75 or over any remaining
funds will be subject to income tax at the beneficiary’s
marginal rate if paid as an income. Lump sums will initially
be taxed at 45% instead but the government intends this to
be temporary (until 2016/2017). My article on page 18 covers
death benefits in more detail.
FAD AND BENEFIT CRYSTALLISATION
EVENTS
Tax-free lump sum
Moving into FAD will trigger a benefit crystallisation event
Taxable withdrawals
and funds will be tested against the lifetime allowance (LTA).
The LTA charge will apply in the normal way for example 55%
The graph shows how clients can take a
if the excess over the LTA is taken as a lump sum or 25% if
tax free lump sum when they first move
taken as income.
into drawdown but the rest of the
A second LTA test applies to any growth in the drawdown fund at
money they take is taxable.
annuity purchase or if the member is still in drawdown at age 75.
FOR EXAMPLE
UNCRYSTALLISED FUNDS PENSION LUMP
SUMS (UFPLS)
Michael has a pension fund worth
£200,000. If he moves all of this
into FAD he can take £50,000 as a
UFPLS is the alternative option to FAD. This also allows your
clients to take money from their pension funds flexibly.
tax free lump sum. The remaining
At any time from a client’s minimum retirement date (normally
£150,000 can be used to either:
55) onwards they can choose to take lump sums directly from
• provide a regular income
• take payments from the fund
their pension fund. 25% of any amount taken is tax free cash
and the rest is taxed as income.
as and when he needs them
• take nothing from the fund and
leave it all with the potential
to grow.
However if Michael takes the rest of
his fund, it will be subject to income
tax in the year he takes it.
If at any point Michael decides he
wants a fixed amount of income for
the rest of his life he can use any
remaining funds to buy an annuity.
Tax-free portion
Taxable portion
The graph above shows how 25% of each payment will be
tax-free and the rest taxed as income.
UFPLS AND THE LIFETIME ALLOWANCE
EXAMPLE:
A lifetime allowance test will occur whenever an UFPLS is
Michelle has a £100,000 pension pot. She takes a
taken. To take a UFPLS clients under 75 must have enough
withdrawal of £25,000 using UFPLS. That leaves
available LTA to cover the full payment. Clients aged 75 or
£75,000 in her pension fund.
over must have at least some LTA available before the
• £6,250 of the UFPLS is tax free cash.
• £18,750 is taxable.
Michelle’s taxable income including the UFPLS is within
the 20% tax band so she pays £3,750 income tax on
payment is taken.
UFPLS RESTRICTIONS
As well as the availability of the LTA described above the
the UFPLS.
rules also prevent certain members with primary protection,
Taking £25,000 by using UFPLS leaves her with £21,250
affecting their tax free cash entitlement from using UFPLS.
after tax.
Michelle can continue to use UFPLS to take lump sums
as and when she needs them.
She can also consider moving her remaining pension
pot into flexi-access drawdown.
If at any point Michelle decides that she wants a fixed
amount of income for the rest of her life, she can use
any remaining funds to buy an annuity.
Note: the figures reflect the client’s final tax position after any tax
reclaims or payments due to the PAYE coding applied to the encashment.
UFPLS AND THE MPAA
enhanced protection or lifetime allowance enhancement factors
“FAD GIVES GREATER
FLEXIBILITY BY
GIVING COMPLETE
CONTROL OVER THE
LEVEL OF INCOME”
Once clients take any funds using the UFPLS option the
reduced MPAA applies, restricting any further tax relievable
money purchase contributions to £10,000 a year with no carry
forward available. The normal annual allowance and carry
forward rules remain available for defined benefit accrual.
UFPLS AND DEATH BENEFITS
If your client dies before age 75, any remaining funds can be
paid to their nominated beneficiary free of tax whether it is
paid as a lump sum or income. If they die aged 75 or over any
remaining funds will be subject to income tax at the beneficiary’s
marginal rate if paid as income. Lump sums will initially be
taxed at 45% instead, but the Government plans for this to be
temporary (until 2016/2017).
WHAT’S THE DIFFERENCE?
With a UFPLS your clients always have to take the tax -free
cash and the income element at the same time. Every withdrawal
must be made up of 25% tax- free cash and 75% taxed income.
FAD gives greater flexibility by giving complete control over the
level of income and so allows clients to take the tax free cash
without having to take any income. This will be particularly
helpful where clients are considering further significant pension
funding in the future. However, clients in this position also
need to consider the tax free cash recycling rules.
In practical terms there may be other differences in terms of
product cost, availability and ease of administration.
Iain Naismith’s article on page 7 looks at planning in more
detail.
Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change.
However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given.
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