Over the past 2 years we have had some of the most wide-ranging pension reforms the UK has ever seen. The freedoms introduced put people firmly in control of when and how they take an income from their pension pot. But pension drawdown rules aren’t straightforward and confusion abounds. So, in an attempt to make things clearer, here’s an answer to the 25 most popular questions I get asked.
Answering your questions about pension drawdown rules
1. Who can drawdown from their pension?
Anyone from age 55 can take benefits from their personal pension. However you may be able to access your pension sooner if you’re forced to retire due to ill-health, work in certain qualifying professions or have a protected retirement age below 55. If you have a defined benefit pension, access is determined by the scheme rules and the set normal retirement date.
2. Can I still take a tax-free lump sum?
Yes, subject to your scheme rules. You can take up to 25% of the value of your pension fund as a lump sum without paying any income tax. But be aware that defined benefit schemes have different rules regarding lump sums. Some provide you with a lump sum on retirement as standard, some allow you to “buy” a lump sum by sacrificing some of your regular benefit payments and some do not permit you to take a lump sum at all. Defined contribution schemes have no such restrictions.
3. What types of pension can I drawdown from?
Drawdown applies to employer-sponsored money purchase schemes and all types of personal pensions. Relevant employer schemes include contracted-out money purchase schemes (COMPS), contracted-in money purchase schemes (CIMPS) and small self-administered schemes (SSAS). To take money from your pension pot, you must first move the cash into a drawdown account from where you will make withdrawals.
4. What is a crystallisation event?
You may hear about crystallisation events. The correct technical term is a Benefit Crystallisation Event (BCE) which occurs when a benefit from a pension scheme comes into payment for some reason. At each BCE the nominal value of all your pensions will be tested against the Lifetime Allowance to check if any tax charges are due. There are currently 13 different triggers for a BCE which are defined by HMRC.
5. Will drawdown make me run out of money?
Taking drawdown from your pension will not in itself make you run out of money. However, taking too much money via drawdown could certainly cause you to use up all your money. It’s important to think carefully about the timing of your withdrawals to ensure that your long-term income requirements are met.
6. What happens to the money that I’ve not accessed yet?
Any money in a personal pension that you’ve not withdrawn at death can be passed onto your beneficiaries without incurring inheritance tax. Depending on your circumstances income tax may need to be paid by them on any future withdrawals, but if you die before age 75 there will be no tax charges at all.
7. How often can I withdraw money?
You can withdraw money from your pension as frequently as you want subject to your pension provider’s rules, although you might have to pay a small charge every time you do make a withdrawal.
8. Is there a limit to how much I can drawdown in any year?
No. You can drawdown as much or as little from your pension as you want. Just be aware that if you withdraw a lump sum only the first 25% of your fund’s value will definitely be tax-free.
9. Do I have to take drawdown?
No, there is no requirement to take drawdown. You can still choose to buy an annuity with your pension pot if you want. Indeed, you can leave your pension untouched, keeping it invested and growing for your children free from inheritance tax.
10. Can I choose where to keep any balances invested?
Yes. You have control over where your money is invested, subject only to the funds that are available through your pension provider. You can invest your portfolio in a way that matches your attitude towards risk and choose what types of asset you hold. An adviser can do a comparison of the providers available and recommend the right one for you, as well as which funds would suit your attitude to risk and goals.
11. What things do I need to consider before entering drawdown?
It’s vital that you plan your retirement finances before entering drawdown. You need to be confident that you have a strategy for what assets you’ll use to create your income, when you’ll take withdrawals and how you’ll execute your plan to minimise any tax payable.
12. How much does it cost to open a pension drawdown account?
Charges vary from provider to provider. Some charge around £400, whereas others don't charge if the business is placed with them via an adviser. Additional charges will apply for initial advice, regular reviews and ongoing management of your investments all of which are highly recommended with a drawdown contract.
13. Do I still have to pay fund management fees?
If you keep money in your pension fund invested in the market through one or more investment funds whilst you’re drawing down an income, then there will be fund management charges for those funds. Annual Management Charges vary between funds, and taking advice is recommended.
14. Why would I crystallise only part of my fund?
Partial crystallisation requires expert planning and you should take independent financial advice before adopting this strategy. The benefits of partial crystallisation are now much reduced, following the removal of the tax charge on crystallised funds at death. However, phased crystallisation does maintain a higher level of access to future pension commencement lump sums and uncrystallised fund pension lump sums and as such maintains a higher level of future flexibility.
15. How does tax work on money that I drawdown?
You pay income tax on your marginal rate on any money that you withdraw from your pension, other than the tax-free element of any pension commencement lump sum.
16. What happens to any money that is still in my pension when I die?
If you’ve money left in your pension pot it will be paid to your beneficiaries. As long as it is less than the lifetime allowance (£1.25million in tax year 2015/16) and you die before age 75 it can be paid to your beneficiaries tax-free, either as a lump sum, an annuity, or through flexible drawdown. If you die age 75 or older your pension can be paid as a lump sum which will initially be taxed at 45%. Or your beneficiaries can use flexible drawdown and will then only pay tax at their marginal rate. There would not normally be any inheritance tax to pay.
17. Can I move a pension in drawdown to another provider?
Yes, pension drawdown rules do allow this. You can move any funds in a drawdown fund to another provider although a charge may need to be paid to the provider you are moving away from. HMRC does not allow you to move only part of your drawdown balance to a new provider, so if you move, you’ll need to move the whole balance. This does not apply to any uncrystallised funds.
18. Is Capped Drawdown still relevant?
Capped drawdown is not available to people accessing income after 6 April 2015.
19. Can I take drawdown from my defined benefit scheme?
Not directly. Defined benefit schemes provide benefit based on the scheme rules, not the contributions you’ve made to the scheme. Whilst you may be entitled to receive or buy a pension commencement lump sum with your pension, if you want the benefits of flexible drawdown you will need to transfer to a personal pension. This can only be done 12 months or more before your scheme’s usual retirement age. If you are considering this you should seek independent financial advice first as you may be giving up valuable benefits. Certain unfunded, public sector defined benefit schemes are prevented by statute from allowing transfers out to a private pension.
20. What happens if I was in drawdown before the new rules came in?
If you were already receiving benefit from your pension by way of capped drawdown or flexible income drawdown before the new pension rules were introduced in 2015 your previous arrangements will continue. You can drawdown from uncrystallised funds you may have using the new pension rules.
21. Can I still save into my pension once I’m in drawdown?
Yes, you can still pay into a pension once you have started taking money out of a drawdown plan. However, your annual allowance falls from £40,000 (or 100% of earnings whichever is the lower) to £10,000 when doing so. Very strict rules apply to recycling to get further tax relief so you should think carefully about paying back into your pension that which you’ve just withdrawn. HMRC may view this as an unauthorised member payment and an unauthorised tax charge of 40% and possible surcharges may apply.
22. How do I open a drawdown plan?
You need to choose a drawdown plan provider and complete an application form providing details of your existing pension provider so that the transfer can take place. If you are looking to transfer from an existing defined benefit scheme, you will also need to have already received a guaranteed transfer value (which lasts 3 months) and also a discharge letter from your scheme administrator.
23. Is the age at which I can enter drawdown going to change?
Legislation regarding pension savings changes regularly, as do pension drawdown rules. There may be a link formed in the future between the age at which people can access their pension and the state retirement age. However, this is still unconfirmed.
24. Do I have to seek advice before entering drawdown?
There is no requirement to seek advice before entering drawdown, although we would recommend that you do so in order to ensure you are aware of all the options open to you. Providers may require you to do so if you are transferring more than £30,000 from a scheme with safeguarded benefits. It is also vital you structure your investments properly within drawdown to cater for short term requirements and also your long term goals.
25. Can I have multiple drawdown plans?
Yes, you can have more than one drawdown plan with different providers although keeping all your pensions in once place can provide greater control.
No action should be taken on the basis of this information alone. If you are thinking of transferring your pension benefits from an occupational scheme or personal pension then you should seek independent financial advice first. Any action taken in respect of your pension is usually irrevocable and if not in your best interests may prove costly in retirement. Please note that if a transfer takes place you may be giving up valuable and safeguarded benefits such as a guaranteed income in retirement set at a level that may be unattainable from a drawdown strategy.
It is important that no actions should be taken without advice, and the risk warning should be taken notice in all cases. Personal circumstances and risk profile mean that the advice for one person which may not be the same for everyone.