Is cash really king?

Retirees exploit new pension freedoms

Since 6 April this year, anyone aged 55 or over could – in theory – empty their money purchase pension funds entirely, although any withdrawals will be treated as income and taxed as such. Nine in ten people (90%) going in to drawdown have taken advantage of the new pension freedoms and have chosen to take a cash lump sum, according to pension provider Zurich. The remainder are opting for an annuity or drawdown.

Less onerous tax implications
Among the people accessing their pension, 80% are taking sums of less than £10,000, with the average amount being withdrawn totalling £4,000. This highlights the fact that many are making the most of the new pension freedoms to access their money in a way that best suits them. For very wealthy individuals, high levels of tax may also not be a deterrent, as they would typically be subjected to paying a high level of tax on that income.

Some people are withdrawing small pots in full, while others, according to findings, are taking out small lump sums using the partial uncrystallised funds pension lump sum (UFPLS) option. This is one of the most notable changes brought in on 6 April 2015. An UFPLS can be paid from uncrystallised money purchase funds as a lump sum – there is a 25% tax-free element, and the balance is taxed at the individual’s marginal rate of tax.

Using a pension as a bank account
If the scheme allows, people can take their entire money purchase pot as an UFPLS in one go, or take a series of smaller UFPLSs, each of which will have a 25% tax-free element. Some media reports have likened this to using a pension as a bank account, but the reality is more complex.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.