insideKENT Magazine Issue 39 - June 2015 | Page 167

BUSINESS

PENSION
FREEDOM
WITH THE BIGGEST PENSION REFORMS IN
A LIFETIME, THE PENSION SYSTEM HAS
BEEN COMPLETELY OVERHAULED TO
ALLOW INDIVIDUALS TO TAKE THEIR
DEFINED CONTRIBUTION PENSION POT
HOW THEY CHOOSE. THIS CREATES
GREATER CHOICE AND FLEXIBILITY. THESE
CHANGES WERE FIRST ANNOUNCED IN
THE BUDGET 2014 AND CAME INTO
EFFECT ON 6TH APRIL 2015.
Colin Bannister

The key changes affect how much income you
can take out and death benefits.

to withdraw the whole pension pot at one time,
this may result in a significant income tax liability.

Tax-free cash can be accessed from age 55 and
there is no need to retire. In fact, pension
contributions can continue to be made afterwards.
Up to 25% of your pension value can be
withdrawn completely tax free – either as a single
lump sum or a series of individual transactions.
Withdrawals taken from the other 75% are taxed
as income. This will either be via a conventional
annuity or Flexi-access Drawdown, with the latter
giving you complete freedom over how and when
you take your pension pot.

The Annual Allowance is the maximum value of
pension savings on which you receive tax relief
each year. The Annual Allowance is £40,000 for
the current tax year. However, you could see this
restricted to £10,000 if you make any withdrawals
from a defined contribution pension using the
Flexi-access drawdown route, although you can
still take your tax-free cash.

By way of an example, someone with a pension
worth £100,000 could withdraw £25,000
completely tax free with subsequent withdrawals
taxed as income. Alternatively, they could make
a series of withdrawals over time and receive
25% of each withdrawal tax free.

If you have a pension worth £10,000 or less and
take it as a ‘small pot,’ the reduced Annual
Allowance will not apply. You could take pensions
as small pots up to three times from personal
pensions and unlimited times from occupational
pensions. In addition, the reduced Annual
Allowance does not apply if you entered capped
drawdown before 6th April and your withdrawals
remain within the maximum GAD income limits.

If this person took five lump-sum withdrawals of
£20,000 they would receive £5,000 tax free with
each withdrawal, equating to £25,000 tax free
overall. Withdrawals of £1,000 a month would
receive £250 of each payment tax free, with the
remainder taxed as income. Depending on your
particular circumstances, if you withdraw your
pension in stages rather than all at the same time
this will give you the option to manage your
income tax liability in a more effective way. This
option is not available if you use your pension
fund to buy an annuity. While it may be tempting

The other significant change is in relation to death
benefits, by replacing the word ‘dependent’ with
‘beneficiary’. This change doesn’t affect pension
benefits paid on death before they are taken and
before age 75, as they will continue to be paid
completely tax free. However, once you start
taking your pension or reach age 75, your
beneficiaries have the options of taking the entire
pension pot as cash subject to 45% tax, or
receive a regular income through income
drawdown or an annuity. This change essentially
introduces the term ‘family pe