Under the new system, you are not prevented from accessing your pension savings flexibly if you want to. The options for taking income are:
This new option allows you to draw as much or as little from your pension as you like. There is no upper limit on income, so you can take the entire fund if you wish. Up to 25% of the amount you move into flexi-access drawdown is tax free, if you have not previously used the fund for drawdown. Income thereafter is taxed at your marginal rate of Income Tax.
It must be noted that taking income above a certain level may not be sustainable or tax-efficient.
Uncrystallised funds pension lump sum (UFPLS)
There is a new option that allows you to take a one-off payment or several lump sums directly from the pension fund itself. Each time you take a lump sum though UFPLS, 25% of that withdrawal will be tax free and the rest will be taxed at your marginal rate of Income Tax.
Any income you draw from your pension after receiving your 25% tax free entitlement is taxed at your marginal rate of Income Tax. This means that taking your entire fund, or a high level of income in a single year, could mean you end up paying tax at a higher or additional rate. It may not be tax-efficient or sustainable to take income above a certain level, so please get in touch before making any decisions.
The annual allowance is the maximum amount the government allows you to contribute to a pension and still get tax relief. This is currently set at £40,000 a year.
Once you have accessed income from your pension through flexi-access drawdown, UFPLS, or exceeded the income cap under capped drawdown, you will trigger the money purchase annual allowance (MPAA). Triggering the MPAA changes your annual allowance to £10,000 a year.
Taking your 25% tax free entitlement does not, in itself, trigger the MPAA. In addition, the MPAA is not triggered if you stay within the income cap in capped drawdown or buy an annuity. There are a number of conditions that trigger the MPAA, so it’s important to get in touch if you are unsure.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.