Since pension freedoms were introduced by George Osborne in 2015, there is no doubt drawing down a pension pot is becoming the most popular method by which a person accesses their pension fund after age 55.
It’s interesting that the amount of withdraws is rising as the statistics show savers withdrew £2.4bn between July and September 2019, up 21% over the same period in 2018. However, average amounts withdrawn has fallen. Moreover, 327,000 people made 778,000 withdrawals with the data showing regular withdrawals becoming the norm as the number of withdrawals is rising to an average of 2.38.
Do your staff understand their pension withdrawal options?
When working with employers to provide governance and financial education support, we find almost all staff know about the option to take 25% of the pension fund as a tax free lump sum and this is broadly well understood. However, when we discuss the ability to then use the balance fund to withdraw an income in stages, and the tax implications of doing so, this is less well understood.
The fact is that:
- anyone over 55 wanting to make withdrawals, and
- if that amount falls within the personal allowance, and
- there is no other income
could mean the income is also tax free. If they understand this, a member of the scheme may become very interested in how to manage their pension account.
Example Pension fund on retirement £48,000
Phased withdrawal over three years
| Year 1 | Year 2 | Year 3 | |
| Fund at the 6 April | £48,000 | £32,000 | £16,000 |
| Withdrawal from the fund | £16,000 | £16,000 | £16,000 |
| 25% tax free cash | £4,000 | £4,000 | £4,000 |
| Balance subject to income tax | £12,000 | £12,000 | £12,000 |
| Other taxable income | £0 | £0 | £0 |
| Personal Allowance | £12,500 | £12,500 | £12,500 |
| Tax Due | £0 | £0 | £0 |
| Fund at the end of tax year | £32,000 | £16,000 | £16,000 |
| Amount withdrawn tax free | £16,000 | £16,000 | £16,000 |
| Cumulative withdrawn tax free | £16,000 | £32,000 | £48,000 |
| Assumes no other income subject to income tax. | |||
No growth in assets assumed
Personal Allowance remains unchanged
As the above example shows, there is potential for the flexibility to withdraw not just 25% of the pension fund accumulated tax free, but also a large amount of the remaining fund, simply by keeping withdrawals within the realm of the personal allowance. Imagine a couple in the household using this method, there could be a significant amount of income that can be withdrawn without tax.
Pension have always been attractive because of the tax relief they receive, employer contributions and their tax efficient investment returns. The ability to manage the withdrawals tax efficiently is slowly becoming understood. Supporting employees to improve how the go about withdrawing their hard earned pension savings will help a business manage retiring employees better, including succession planning.
This article first appeared on jelf.com.
