How to navigate the pensions tax landscape since freedoms

  • List what changes in the tax landscape mean for clients in decumulation.
  • Identify why retirement is changing.
  • Describe why annuities are still an option for clients.
How to navigate the pensions tax landscape since freedoms

Changing working practices and demographics in the UK, together with the advent of pension freedoms and the decline of defined benefit pensions holdings, are stimulating us to think differently about retirement. 

Retirement is no longer a ‘once and done’ life event at which you down tools sometime between 60 and 65-years-old and then start drawing on your two-thirds of final salary pension through a default annuity.

Nearly half of the 1,002 baby boomers aged 54 to 71-years-old that Dunstan Thomas surveyed across the country in late 2017 were dependent on less generous defined contribution pensions.  

Those retiring today are more likely to have a mixture of DB and DC pensions, other savings in Isas, even buy-to-let properties and, if they are lucky, an inherited nest egg.

Around one-in-seven boomers also plan to release home equity to boost their retirement incomes.

Retirement is changing

They may exercise the new freedom to access a pension at age 55 and go part-time or take a career break, later going back to work as a lifestyle choice or to top up their retirement savings pot.

Others are choosing to work right through into their 70s. Some begin drawing their pension and then want to stop when they get an opportunity to go back into paid work.

Given this changing backdrop, it is worth considering some changes in the pensions tax landscape since the freedoms to ensure your decumulating clients are optimising their retirement income and not incurring unnecessary tax charges.

Here are a few areas to consider:

• Capped versus flexi-access drawdown affects the money purchase annual allowance significantly.

No new capped drawdown arrangements have been allowed since April 6 2015.

In these legacy arrangements, the amount you can take as income is capped at 150 per cent of the income a healthy person of the same age, based on GAD rates, could get from a lifetime annuity.

Capped arrangements must be reviewed every three years if you are under age 75 and yearly after this, a service that providers will typically charge £150 to £250 for.

On the review date a new maximum income is calculated based on the revised fund size and prevailing government actuary department rates – and set for the next period.

You may have already moved your clients over to flexi-access drawdown, but if you still have clients in capped drawdown, it is worth looking again.

The key merit of staying in capped drawdown comes if a client’s circumstances have changed significantly and they want to put a good deal of new money into their pension having started benefit crystallisation, that is, drawing on the pension.

In this scenario in capped drawdown, you still have a £40,000 MPAA so you can pay that much each year into your income drawdown policy tax free.

However, in flexi-access drawdown you are reduced to the much less generous £4,000 MPAA.