• Existing plans can remain in place and operate in the same way as currently, with three yearly reviews and income restricted to 150% of GAD.
• It will be possible to convert capped drawdown to FAD at the member’s request.
• Capped drawdown plans will automatically convert to FAD if the member takes income exceeding 150% GAD.
• The member retains the standard £40,000 annual allowance where their income remains within GAD limits, provided they don’t trigger the MPAA via other arrangements.
• It will be possible to transfer existing capped drawdown plans between providers.
Individuals aged 55 and over could designate some funds for capped drawdown before 6 April 2015, if they haven’t already done so. If their drawdown product allows, they’ll be able to designate further funds in the same arrangement post April 2015 and remain in capped drawdown. They can retain the full £40,000 annual allowance, while being able to take drawdown income within the 150% GAD limit. However, anti tax free cash recycling provisions will bite, amended from April 2015 to apply if someone takes at least £7,500 tax free cash over a 12 month period.
Uncrystallised funds pension lump sum (UFPLS)
• This is a new concept: a lump sum drawn directly from uncrystallised money purchase pensions.
• 25% of the lump sum is paid tax-free.
• The balance is taxed at the member’s marginal rate of income tax.
• It’s possible to take a series of UFPLSs, each treated as a mix of 25% tax free cash and 75% taxable funds.
• Unlike FAD, it isn’t possible to take the tax free cash without receiving taxable income.
• Once an individual takes a UFPLS, the £10,000 MPAA applies.
• Some restrictions apply to members with primary protection, enhanced protection or lifetime allowance enhancement factors affecting their tax free cash entitlement.
Example
Bill is 66 and needs approximately £20,000. His 2015/2016 income is made up of £6,029 state pension and £7,105 occupational pension. He’s got limited emergency cash funds. However, he still has an uncrystallised personal pension of £50,000. There
are no factors restricting his ability to use UFPLS.
To obtain just over £20,000 net, he’d have to withdraw a UFPLS of £23,600:
25% tax free cash - £5,900
Taxable lump sum - £17,700
£23,600
Income tax £17,700 x 20% (£3,540)
Net amount £20,060
His existing pension in-come totalling £13,134 uses up his £10,600 personal allowance. His total taxable income of £30,834 (£13,134 + £17,700) falls within the personal allowance plus the basic rate band (£42,385). So he’s liable to 20% income tax on the taxable element of the UFPLS.
The £26,400 balance of his pension fund remains invested. He can take further UFPLSs if wanted, each treated as 25% tax free cash and 75% taxable income.
He’s now caught by the MPAA. Bill might be able to avoid this if he can take the required funds as up to three small pots of up to £10,000 each.
