From April 2015 it will be possible for pension holders who have a money purchase scheme to cash in their pension pots, instead of drawing an income.
Anyone with such a pension will still have the option to drawdown 25% of the pension as a tax free lump sum and will still be able to purchase an annuity to provide them with an income. However, there will from April 2015 be an option for flexi access drawdown or to draw an uncrystallised lump sum from the pension. Drawing an uncrystallised lump sum is a mechanism of accessing funds from the pension without formally retiring.
If a pension holder opts for a flexi access drawdown they can drawdown any amount they wish at any frequency. However, if they are drawing down more than 25% of their tax free lump sum, the funds that they access will be treated as 100% taxable income during that tax year. In addition once the drawdown has taken place the pension member will be subject to new Money Purchase Annual Allowance rules (MPAA).
MPAA rules state that if you use flexi access drawdown on your pension in subsequent tax years you will not be able to invest a total of more than £10,000 per annum into your pension pot. If you do invest more than that then you will be taxed. The basic position is that if a pension member wishes to use flexi drawdown it is sensible for them to do this after they have stopped working on the assumption that they no longer want to make any future pension contributions.
The second additional option available from April 2015; Uncrystallised Funds Lump Sums (UFLS) is a method of accessing a pension fund with out buying an annuity or putting it into drawdown. The lump sum can be any amount up to the whole value of the pension fund but no more than the member’s remaining lifetime allowance. Lump sums can be taken any at time provided the member has not previously put the funds into drawdown, they are over 55 or fulfil ill-health criteria. Again 25% of the lump sum taken can be taken tax free with the remainder being taxed as income. Once a UFLS has been taken, the member will be subject to MPAA rules (effectively preventing them from investing more than £10,000 per annum into their pension).
What implications do the changes have if I am going through a divorce?
One of the options available in a divorce is “offsetting”. This involves a spouse receiving cash in exchange for the other spouse retaining their pension. It was always the case that if you were considering this option, a reduction in the cash amount compared to the value of the pension claim would be applied on the basis that tax is payable on pension income and a pension is not a liquid asset.
One of the implications of the new rules is that if the pension member is over 55 then you will no longer apply a discount for cash for offsetting purposes. The offset value of any money purchase scheme where a member is over 55 should not be less than the amount the member could receive if the pension is cashed in. It should be possible to find out from the pension provider how much the pension holder would receive if he or she did opt to cash in the pension scheme.
Consideration needs to be given of the tax consequences if the pension member is opting for drawdown or uncrystallised lump sums.
Author: Lincoln divorce solicitor, Emma Lawler
Published: Friday 27th March 2015
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