A time of change – and opportunity
From 06 April 2015 the new pension rules mean that everyone over the age of 55 will have more freedom to access their savings in a way best suited to their needs. We have adapted our pension proposition in line with the changes and are ready to give you all the support you need to maximise the opportunities they present.
A great opportunity
The old world
In the past, most retirees had two main income options when it came to their pension savings (both of which could be combined with a tax-free lump sum).
They could buy an annuity, which guaranteed them an income, but meant they lost access to their savings.
Alternatively, they could use income drawdown. This would leave them in control of the assets they had built up, with the potential to pass them on to their loved ones. However, they would have to manage the income they took – and, in most cases, there would be strict limits on what they could receive.
The new world
The situation is now very different. Retirees have more options and the freedom to combine them in the most appropriate ways for their specific situations.
This includes unlimited access to their savings through drawdown and Uncrystallised Fund Pension Lump Sum UFPLS (in addition to the tax-free lump sum), plus the option of buying an annuity.
A great opportunity for you
It’s not just existing savers who could benefit from these new rules. This is a great opportunity for you too. More options bring opportunities and challenges for investors. Many people will be looking to their financial advisers for ongoing guidance and support when planning for their futures.
We are ready
As soon as the new pension rules come into effect, the Zurich Intermediary Platform will offer:
- Full and partial flexi-access income drawdown, with no platform-minimum asset value, so the decision can be based purely on a client’s best interests
- The option of using flexi-access drawdown to take just the tax-free lump sum.
- Ongoing support for capped drawdown (under ‘grandfathering’ rules) for clients who have set it up by 5 April 2015.
- The freedom to withdraw money though an Uncrystallised Fund Pension Lump Sum (UFPLS) payment
What does this mean?
We want to support you through any changes that your clients may wish to make to their retirement account so please don’t hesitate to contact your sales consultant.
Do you have clients already invested in a Zurich Retirement Account but currently not in drawdown?
Under the proposed drawdown grandfathering rules, if a client has capped drawdown on 5 April 2015, they will still be able to move money into it at a later date.
So by taking out a retirement account and putting a small amount into capped drawdown before 6 April 2015, your clients can keep this option open.
This is important because income from capped drawdown won’t trigger the Money Purchase Annual Allowance (MPAA). If your client is happy to take income within the GAD max limit, and/or needs to continue making payments to money purchase pensions of more than £10,000 a year, this could give them more options in the future.
Do you have clients already invested in a Zurich Retirement Account but with capped drawdown?
The new flexi-access drawdown option offers a number of potential benefits such as the choice for your clients to have unrestricted access to their savings as and when they want.’ which may make it more attractive for some clients than capped drawdown.
Your clients on the Zurich Intermediary Platform who are in capped drawdown before 6 April 2015 will therefore have two options after that date. They can:
- continue with capped drawdown, or
- convert to flexi-access drawdown, if they want to take income in excess of the GAD maximum.
Advisers have always played an important role in their clients’ tax plans, but with the new pension freedoms, there is the opportunity to help more people in many more ways. Tax information is based on our understanding of HM Revenue & Customs legislation and practice (March 2015)'
Under the rules, money withdrawn from pensions is taxed as earnings, so it falls under the current income tax bands. This means a large withdrawal (excluding tax-free cash) could significantly affect a client’s marginal rate of tax particularly when any other income is taken into account.
If it takes them over £100,000, it could even see them losing some or all of their personal allowance. While they would still receive a lump sum they could use as they wish, a significant portion of their withdrawal would actually go to HMRC.
This is why we believe the effective use of withdrawals – whether from drawdown or an Uncrystallised Fund Pension Lump Sum (UFPLS) – is a key area where advisers can help their clients make the most of their pension savings.
Inheritance tax and death benefit charges
With the abolition of the 55% death tax announced in the 2014 Autumn Statement, your clients have much more scope to pass their assets on to their loved ones.
For those who die under the age of 75, lump sums and income through drawdown are tax free for any of their beneficiaries. For over 75s, the 55% tax on lump sums has been cut to 45%, while drawdown payments will be taxed as income.
Clients can still take up to 25% tax-free lump sum from their pension, as long as they opt to buy an annuity or crystallise their savings into drawdown. However, the process is somewhat different for a UFPLS. In this case, 25% of any withdrawal is tax free and the remaining 75% is taxed as income.
This means that if your clients are taking 25% tax-free cash, they are going to get a lower income than if they used 100% of their fund for an income. Under the new rules, UFPLS means that your clients could withdraw even more as a lump sum (albeit it not all tax free) that would even further reduce the remaining fund available to provide an income through retirement.
Helping clients understand this situation, and how it relates to their own needs, could be a key challenge, and opportunity, for many advisers.
The annual allowance
Now that people have much greater access to their pension savings, the government is understandably concerned they might try to ‘recycle’ some withdrawals back into their pensions to receive another round of tax relief.
As a result, when taking an income from flexi-access drawdown or an UFPLS withdrawal is made, the amount your clients' will be allowed to pay into a money purchase scheme is £10,000, with no opportunity to carry forward. This is known as the MPAA (Money Purchase Annual Allowance).
Potential pension pitfalls
While the pension freedoms are a wonderful opportunity for most retirees, they have created some additional risks that people need to be aware of.
Lasting longer than their savings
The key challenge for retirees now they have unlimited access to their savings is ensuring their money lasts as long as they do – particularly as increasing life expectancies mean retirement could last two or three decades.
While annuities are still available for those who want a guaranteed income, there is a chance that more will opt for the flexibility that drawdown and UFPLS provides. They could benefit from expert advice to help them manage withdrawals and the remaining assets.
Cutting their annual allowance
As soon as a drawdown payment (excluding the tax-free lump sum) or Uncrystallised Fund Pension Lump Sum (UFPLS) is taken, your client’s annual allowance is cut to just £10,000. This is known as the MPAA – Money Purchase Annual Allowance. The one exception is for withdrawals made under the 'small pots' rules, which are explained below.
For those looking at accessing some portion of their savings before retirement, this could be a decision that requires careful thought.
Needing to notify other schemes about triggering the MPAA
When the MPAA is triggered your client would be responsible for notifying any other Defined Contribution pension providers they hold a plan with. If they fail to do this within 91 days, they could face a fine from HMRC.
Failing to make the best use of their savings
With more options to choose from, and the freedom to combine them in whatever way a retiree wants, it could be easy for some people to become overwhelmed – and potentially make poor decisions.
The support of a financial adviser could play a pivotal role in helping these clients navigate their options and make the most of their pensions.
Paying more tax than they need to
With pension withdrawals, and annuity payments, taxed as income, careful planning could help retirees minimise their tax exposure over the long term.
Paying emergency tax on a UFPLS
When your client takes UFPLS, the pension provider won’t know their tax position so the entire sum (apart from the 25% that is tax free) will be counted towards a single month’s earnings for emergency tax.
On a £30,000 withdrawal, including the tax-free lump sum, this could mean nearly a third of the money is paid to HMRC and has to be reclaimed later through a tax return. In comparison, a single drawdown payment can be attributed to the full year, so the correct level of tax is paid straight away.
Missing out on the ‘small pots’ rules
Your clients can take up to three pensions worth up to £10,000 each as cash, without triggering the MPAA or affecting the Lifetime Allowance. This ‘small pots commutation’ still allows for tax-free cash from 25% of each pension pot, with the remainder taxed at the individual’s marginal rate. The age a client can take small pots is reducing from 60 to 55 in the new tax year.
Making sure their pension provider offers the income options they want
There are no requirements for pension providers to offer all the new income options – or any of them. If a client has a particular plan in mind, or their adviser has identified a suitable income combination for them, they may need to transfer their pension schemes to access it.