Taking benefits Print
Historically pension benefits had to be taken by age 75. This no longer applies and it is now up to the individual to decide whether or not to take pension benefits.
Tax free lump sums no longer need to be taken by age 75 but if an individual dies after age 75 with unvested lump sum benefits, these can be paid as lump sum death benefits but are subject to income tax at the beneficiaries marginal rate of income tax.
There are five main options to consider when taking benefits – one in respect of secured income and four relating to unsecured income options.
a) Secured Income
This is payable by way of a lifetime annuity or through a scheme pension. The pension must be payable until death, or possibly longer if it is guaranteed to be paid for a specified period of up to 10 years.
b) Unsecured Income via a Short Term Annuity
Payable by a short-term annuity, which must have a term of no more than 5 years or until the member’s 75th birthday if sooner.
c) Flexi-Access Drawdown
Taxable income is paid from the individual’s crystallised (vested) pension fund after payment of the tax free lump sum.
There are no limits on the level of taxable income which can be withdrawn. In effect the entire fund can be taken in one single payment. There is no minimum income limit.
d) Uncrystallised Pension Fund Lump Sum
Since 6 April 2015 the option to take benefits under triviality from a defined contribution plan has been removed and replaced with an Uncrystallised Funds Pension Lump Sum (“UFPLS”).
Unlike triviality there is no maximum value of benefits that can be taken. Nor is there any time period that benefits have to be taken, so it is possible to phase benefits.
To use this option the individual must be over age 55, not have primary or enhanced protection with protected tax-free cash over 25% and have available Lifetime Allowance (“LTA”):
- those under age 75 will need the whole of the UFPLS to be within their LTA;
- those over age 75 only require part of the UFPLS to be within their remaining LTA, however any amount in-excess of the LTA will be taxed at 55%.
UPFLS is only available from uncrystallised funds, so it is not possible to pay an UFPLS from drawdown funds.
Taking this option will trigger the Money Purchase Annual Allowance of £4,000 in respect of future pension inputs.
75% of the value of the UFPLS will be added to the individual’s taxable income in that year and be taxed at their marginal rate. If the plan allows, it would be possible to phase benefits by using partial UFPLSs that would allow the member to manage their income tax liability.
e) Scheme Pension
The maximum income that can be withdrawn from the Scheme Pension is calculated by the scheme actuary. This is based on the age, health and fund value of the applicant and is not based on the Government Actuary’s Department (GAD) limits. The income available from the Scheme Pension could potentially be higher than the maximum income available from drawdown.
Death Benefits from a scheme pension can be paid via a number of ways. If selected at the outset a scheme pension can be chosen with a ten year fixed period. Any remaining funds thereafter can either be paid as a lump sum or used to provide widows/dependent’s pensions.