PENSIONS - 21.10.2020

Tax planning for taking your pension savings

The government says that the age for accessing private pension savings is to be raised from 55 to 57. If you’re in your late 40s or older, how might this affect your pension plans?

Delayed pension

In September 2020 the government confirmed that from April 2028 the age at which you can access your pension savings will rise to 57 (from 55). The change is especially important if you were born between April 1971 and April 1973. You’ll have a relatively short window between your 55th birthday and 5 April 2028 in which to decide whether to take any of your pension savings or wait up to another two years. Even if you have started to take your pension savings when the change occurs you might be affected depending on how you access them.

Pension benefits

There are different ways to access your pension savings when you reach the qualifying age. This partly depends on whether your pension fund is a money purchase or a final salary scheme. The latter is rare these days so we’ll only consider money purchase schemes.

Tax-free cash, UFPLSs and annuities

When you reach the qualifying age you can take 25% (or less, if you prefer) of your fund tax free as a lump sum (tax-free cash) and with whatever is left:

  • buy an annuity (lifetime pension); or
  • draw sums regularly, known as a drawdown, all of which will be taxable as income. While these can be taken ad hoc, generally pension companies operate drawdown plans that provide regular income say, monthly.

If you don’t take a tax-free sum you can instead take uncrystalised fund pension lump sums (UFPLSs). 25% of a UFPLS is tax free and the balance taxable as income. They can be taken when you want, in varying amounts and with little admin. For this reason they are popular but might become problematic when the change in qualifying age takes effect.

UFPLS trouble

If you plan to access your pension when you reach 55 or even 56, the higher age limit might throw a spanner in the works; not just from April 2028 but up to two years earlier.

Trap. Because UFPLSs are ad hoc payments the qualifying age must be considered each time you take one. So, if you start taking UFPLSs when you reach 55 you might temporarily lose the right to take further payments for up to two years.

Example. Jen is a company director. Her 55th  birthday falls on 10 April 2027 at which time she plans to draw UFPLSs once a month to top up her salary as she moves into semi-retirement. When the pension qualifying age changes to 57 Jen will be just 56, which means she won’t be able to access any of her pension savings again until her 57th  birthday. That could leave her short of income until then. There are ways that Jen can dodge the potential income shortfall.

Tip. Jen could take her tax-free cash when she reaches 55 and gradually use this until she reaches the new qualifying age. Alternatively, she could take an especially large UFPLS before the qualifying age increases and again use this gradually until she can again draw on her pension savings. In essence, as long as you are aware of the potential problem the higher qualifying age can cause it’s simple to avoid it.

If you reach 55 shortly before the qualifying age changes but don’t access your pension savings, you’ll have to wait up to another two years to do so. Even if you access your funds you might face a similar problem if you take uncrystalised fund pension lump sums. Therefore, consider alternatives such as tax-free cash lump sums and drawdowns.

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