The latest HMRC statistics relating to flexible pension withdrawals under the 2015 reforms give an interesting indication of how pensions have been affected by policy changes.
Recent years have seen numerous changes to an already complicated pensions landscape.
Those with money purchase pension savings have, since April 2015, been able to take advantage of pensions flexibility. When the Chancellor put forward the idea, it was said that people could use their pensions ‘like a bank account’, to do more or less what they liked, when they liked with their money.
People with defined benefit pension schemes are not able to do this, but they might be able – subject to various restraints – be able to transfer to a money purchase scheme and then use pensions flexibility.
What has been the effect of these changes?
The statistics on flexible pensions have been updated to reflect what has happened in the second quarter of 2018 (see https://bit.ly/2OAlnq3). As has been the case since the start of these rules, many people are taking advantage and cashing in their pension savings.
Quarter 2 for 2018 was indeed a bonanza period for pensions withdrawals, with the largest ever amount (£2,269m) withdrawn in a single quarter since the rules were introduced. Clearly, some pensioners must now be enjoying some very nice summer holidays!
More seriously, as the withdrawal figures continue to rise, questions might perhaps be asked of Government as to whether this policy may turn out to be a victim of its own success if the money is not being put to best use in terms of what pensions were originally intended for: providing for people’s retirement years.
Practical considerations
Taxpayers making flexible pension withdrawals need to exercise extreme caution in doing so in terms of the tax liability they create for themselves in the process. They need to consider their position in the round, looking at whether:
a lump sum takes them into higher rates of tax
straying into higher rates in turn means they lose out on other tax reliefs such as the so-called personal savings or marriage allowances (savings nil rate or transferable tax allowance)
they might be better off if they phase withdrawals, rather than taking a one-off lump sum
a high income child benefit charge is created and its consequent obligation to register for self assessment
adjusted net income exceeds £100,000 as a result of the withdrawal, at which point the personal allowance starts to be withdrawn, and entitlement to both tax-free childcare and 30 hours free childcare for 3 and 4 year olds can be lost
The last two points above may not concern everyone who is taking flexible pension payments, but given that funds can be withdrawn at age 55, some families that still have younger children could well be affected.
Pension withdrawals are also income for tax credits, so entitlement to those (or indeed other state support) may be affected.
Advisers may of course be aware of these issues, but you may well only find out about pension withdrawals when it’s too late, for example when taking on a new client or where an existing client makes a withdrawal without consulting you.
Given the risks involved in triggering potentially large and unexpected tax liabilities, it is well worth reminding clients at every opportunity to seek tax advice before taking action.
Home >Articles > The pensions flexibility boom continues
The pensions flexibility boom continues
The latest HMRC statistics relating to flexible pension withdrawals under the 2015 reforms give an interesting indication of how pensions have been affected by policy changes.
Recent years have seen numerous changes to an already complicated pensions landscape.
Those with money purchase pension savings have, since April 2015, been able to take advantage of pensions flexibility. When the Chancellor put forward the idea, it was said that people could use their pensions ‘like a bank account’, to do more or less what they liked, when they liked with their money.
People with defined benefit pension schemes are not able to do this, but they might be able – subject to various restraints – be able to transfer to a money purchase scheme and then use pensions flexibility.
What has been the effect of these changes?
The statistics on flexible pensions have been updated to reflect what has happened in the second quarter of 2018 (see https://bit.ly/2OAlnq3). As has been the case since the start of these rules, many people are taking advantage and cashing in their pension savings.
Quarter 2 for 2018 was indeed a bonanza period for pensions withdrawals, with the largest ever amount (£2,269m) withdrawn in a single quarter since the rules were introduced. Clearly, some pensioners must now be enjoying some very nice summer holidays!
More seriously, as the withdrawal figures continue to rise, questions might perhaps be asked of Government as to whether this policy may turn out to be a victim of its own success if the money is not being put to best use in terms of what pensions were originally intended for: providing for people’s retirement years.
Practical considerations
Taxpayers making flexible pension withdrawals need to exercise extreme caution in doing so in terms of the tax liability they create for themselves in the process. They need to consider their position in the round, looking at whether:
a lump sum takes them into higher rates of tax
straying into higher rates in turn means they lose out on other tax reliefs such as the so-called personal savings or marriage allowances (savings nil rate or transferable tax allowance)
they might be better off if they phase withdrawals, rather than taking a one-off lump sum
a high income child benefit charge is created and its consequent obligation to register for self assessment
adjusted net income exceeds £100,000 as a result of the withdrawal, at which point the personal allowance starts to be withdrawn, and entitlement to both tax-free childcare and 30 hours free childcare for 3 and 4 year olds can be lost
The last two points above may not concern everyone who is taking flexible pension payments, but given that funds can be withdrawn at age 55, some families that still have younger children could well be affected.
Pension withdrawals are also income for tax credits, so entitlement to those (or indeed other state support) may be affected.
Advisers may of course be aware of these issues, but you may well only find out about pension withdrawals when it’s too late, for example when taking on a new client or where an existing client makes a withdrawal without consulting you.
Given the risks involved in triggering potentially large and unexpected tax liabilities, it is well worth reminding clients at every opportunity to seek tax advice before taking action.
