PENSIONS REFORM 6 APRIL 2015 YOUR QUESTIONS ANSWERED. Following Government changes effective on 6 April 2015, there are different ways for anyone over 55 to access their defined contribution pension pots and this will give you more flexibility when accessing your pension pot. We ve put together some information to help you understand what these changes are.
2 2015 PENSIONS REFORM YOUR QUESTIONS ANSWERED QUESTIONS AND ANSWERS To guide you through these new options, the Government will offer you free and impartial guidance that we strongly recommend you should access in the first instance. You ll be able to find out more on their dedicated Pension Wise website www.pensionwise.gov.uk. This service will also offer guidance over the phone or face to face. 1. Do these changes apply to all types of pension scheme? The changes apply only to people with defined contribution pensions. This is a type of pension also known as a money purchase scheme. This is when the money you and/or your employer pay into your pension scheme is invested by a pension provider. The amount you receive when you take your benefits usually depends on how much has been paid in, the charges deducted and how well the investment has done. These changes do not apply to final salary or defined benefit pension schemes. Such schemes pay guaranteed benefits based typically on your salary and years of service since joining the scheme. If you re a member of this type of scheme, we recommend that you contact a financial adviser for advice. 2. Will I be able to take money out of my pension pot as and when I need it? This will depend on whether partial lump sums are allowed under your pension product. See the Your Product Options summary which explains what you are able to do in your plan. If your pension plan allows this option, you can take partial lump sums twice a calendar year, at a minimum of 5,000 gross/before tax on each payment. When you take a lump sum you must leave at least 5,000 in your pension pot. If your pension plan does not allow this option, other options may be available if you transfer away from your current plan to a different pension product. 3. If I take my pension pot as a lump sum would I pay more tax? It s important to consider the tax consequences of taking your pension pot as a lump sum. As the balance over your tax-free cash amount, usually 25%, will be added to your income in that tax year and taxed as earned income, it would increase your earned income for that tax year and increase the amount of income tax due. Page 7 shows an example of how you could be taxed. 4. What are the small pension pots rules, and are there any restrictions? If you re over the age of 55 and your pension pot is 10,000 or less, it may be classed as a small pension pot. You can take the full amount as cash and not affect your Annual Allowance. 25% is tax free and we ll deduct 20% income tax from the other 75% (see Question 5 for more details). However, in most cases you can only do this three times in your lifetime.
2015 PENSIONS REFORM YOUR QUESTIONS ANSWERED 3 5. How will Legal & General deduct the tax from money taken out of my pension pot? The amount you receive from us may not be the full amount you are due. Where you are taking a payment/cash lump sum from your pension pot (and you are not taking your pot under the small pension pot rules), the first payment will be taxed using an emergency tax code. This is a code we use until HM Revenue & Customs (HMRC) sends us (and you) your correct code. It ensures that you receive the basic personal allowance but doesn t take into account any other allowances or reliefs you may be entitled to. We ll keep using it until HMRC tells us (and you) what your correct tax code should be. Where you re taking some or your entire pension pot in one payment, we ll confirm the details of this payment so you can reclaim any overpaid tax from HMRC. We ll send a P45 for partial and full pot lump sum payments and either could result in a tax overpayment. Where you take your pot under the small pension pot rules, we re required to apply tax on the portion above your 25% tax-free entitlement at the basic rate amount of 20%, even if you aren t a basic rate taxpayer. This means that, depending on your overall income, the amount of tax we deduct may be more or less than the amount you should pay. If you think we ve paid too much or not enough tax, you should contact HMRC. 6. If I access my pension pot, what will happen to my Annual Allowance? The Annual Allowance for the current tax year is 40,000. It takes into account gross contributions paid by you and any contributions paid by your employer or third parties to any Registered Pension Scheme. If the total contributions to all of your pensions adds up to more than the Annual Allowance you will have to pay a tax charge on the amount paid above the Annual Allowance. However, unused allowances from up to three previous tax years may be available. The Annual Allowance will reduce to 10,000 if you take money from any pension pot you have, other than in specific circumstances such as taking only your tax-free cash or all of your money under the small pension pot rules. Once your Annual Allowance is reduced to 10,000, you will not be able to use any allowances from previous tax years. 7. Am I able to take part of my pension pot as a lump sum and continue to pay into it? This will depend on whether this option is allowed under your pension product. The Your Product Options summary will explain whether this facility is available on your pension plan. Other options may be available if you transfer away from your current plan to a different pension product or provider. If you continue to make contributions your Annual Allowance could be reduced (see Question 6). You will also need to inform any other pension providers that you have a reduced Annual Allowance.
4 2015 PENSIONS REFORM YOUR QUESTIONS ANSWERED 8. What happens in the event of my death? If you die before taking your benefits from this pension, your pension pot will be paid to your spouse, registered civil partner or nominated beneficiary/beneficiaries. If you haven t nominated a beneficiary, and don t have a spouse/registered civil partner, we will pay any death benefits at our discretion, taking into account the range of potential beneficiaries detailed in your Member s Booklet/Member s Policy Booklet. If you make a nomination, we will not be bound by this but will take this into account when deciding who to pay the benefit to. New rules apply from 6 April 2015 that mean if you die before age 75, your pension pot will be passed as a lump sum to your beneficiary, tax free. If you die after age 75, your pension pot will be passed to your beneficiary who will either be able to: take it as a lump sum taxed at 45%. From 6 April 2016, this will be taxed as earned income; or if the product allows, take it as an income that would be taxed as earned income. 9. What is Flexi-Access Drawdown (FADD)? This is a new way of taking income from your pension pot that will be available from 6 April 2015. You can take 25% tax free as a lump sum and take the rest of your pot, either all or some, as income. This will be added to your income in that tax year and taxed as earned income. You can still make further pension contributions but these will be subject to a lower Annual Allowance of 10,000 (instead of 40,000) - see Question 6 for more details. If this is an option allowed under your plan with us, you will need to have more than 50,000 invested in your plan before you can place your pension pot into Flexi Access Drawdown. 10. I have been in Capped Income Drawdown for several years, what will my options be after 6 April 2015? If you are in Capped Income Drawdown before 6 April 2015, there will be no changes to your existing plan and you can continue in Capped Income Drawdown. You will be able to make contributions up to the 40,000 Annual Allowance. However, from 6 April 2015, if you choose to take more income than your capped limit (see your Annual Review statement for details), you will need to review your options. If you move to Flexi-Access Drawdown, the new reduced 10,000 Annual Allowance will apply to any contributions you make into any pension plans (see Question 6).
2015 PENSIONS REFORM YOUR QUESTIONS ANSWERED 5 11. Will tax relief on pension contributions change? No, this will remain the same. If you have one of our personal pension or stakeholder plans we will continue to claim tax relief for you at the basic rate (currently 20%) and add it to your pension plan. You will need to claim back any higher/additional rate tax relief from your local tax office. No tax relief is available on contributions paid after you reach age 75. 12. If I am able to take a partial lump sum, can I extend my selected retirement date and keep my plan invested in the same way as before I took any money from it? Taking a partial lump sum will not impact any options on your plan. You can extend your selected retirement date up to the maximum age your pension plan allows. 13. If I already have or am planning to buy an annuity, will I be able to cash that in or close it after 6 April 2015? You will need to speak to your annuity provider to confirm whether this is possible. Currently, if you have an annuity with Legal & General, you will not be able to cash it in. 14. If I decide to access my pension pot, will my State benefits or housing benefit be affected? If you decide to access your pension pot, this may affect any State or housing benefits that you receive. You should check first by contacting the Pension Service on www.gov.uk/contact-pension-service; your local tax office; or seek guidance from the Pension Wise website www.pensionwise.gov.uk. 15. I currently live overseas, how will I be affected by the changes? There is guidance on pensions and living abroad on www.pensionwise.gov.uk/livingabroad. If having read this and taken the pension guidance you still need some help, you may wish to speak to a financial adviser for specialist advice.
6 2015 PENSIONS REFORM YOUR QUESTIONS ANSWERED 16. What will happen if I have protected tax-free cash, (that is, my tax-free cash entitlement is greater than 25% of the fund)? If you have any protected tax-free cash, you ll still be entitled to receive this. You should know if this applies to you as you will have received confirmation of any higher tax-free cash entitlement from your provider. Once you ve taken your protected tax-free cash, you are able to: take a small pension pot; or opt for Flexi-Access Drawdown; or buy an annuity. However, if you take out your pension pot as a full or partial lump sum, your tax-free cash entitlement will reduce to 25%. If you don t take your full protected tax-free cash, you ll pay more tax overall when you don t need to. 17. I am in ill-health and below the age of 55. Am I able to take my benefits? There are a number of options available to you if you are in ill-health, but we would recommend you access guidance from the Pension Wise website www.pensionwise.gov.uk. If having had this guidance you still need some help, you may wish to seek advice from a financial adviser. 18. Who can I contact to help me decide what s best for me? If you are deciding whether to access your pension pot, we recommend you use the new free and impartial Pension Wise guidance service, available from 6 April 2015. You ll be able to find out more on their dedicated website www.pensionwise.gov.uk. This service will also offer guidance over the phone or face to face. The Money Advice Service can provide you with detailed information around the options and the new rules in their brochure Your pension: it s time to choose which can be found on their website www.moneyadviceservice.org.uk. You may also want to speak to a financial adviser before you make any decisions about your future. If you don t have a financial adviser, you can find one in your local area by visiting www.unbiased.co.uk.
2015 PENSIONS REFORM YOUR QUESTIONS ANSWERED 7 HOW YOUR PENSION POT IS TAXED During the tax year when you take all or part of your pension pot as a lump sum, the amount you take (after your tax-free lump sum) is added to any other taxable income during the same tax year and is taxed as earned income. Income tax is split into bands and you pay different rates (20%, 40% and 45%) on earnings that fall into each band. The table below illustrates this: TAXABLE INCOME This is the amount of earnings a person will pay income tax on: Taxable income = total earnings Personal Allowance PERSONAL ALLOWANCE A person born after 5 April 1948 has a basic personal allowance of 10,600 a year; this is the amount of income they can earn during a tax year before paying income tax. The Personal Allowance reduces by 1 for every 2 of income above 100,000, and is therefore zero if income is above 121,200. RATES OF INCOME TAX (MARGINAL RATES) 2015/2016 rate of income tax: Nil income tax (For most, 0 to 10,599 0% Basic rate (For most, 10,600 to 42,385) 20% Higher rate (For most, 42,386 to 150,000) 40% Additional rate (Over 150,000) 45% INCOME TAX THRESHOLD Taxable income above which the higher rate applies 31,785 Taxable income above which the additional rate applies 150,000 (No Personal Allowance see above) SAVINGS This example does not include savings or income earned from savings.
8 2015 PENSIONS REFORM YOUR QUESTIONS ANSWERED Generally pensions are taxed in the same way as your salary is paid. The amount of tax that you pay is determined by your tax code (also known as your PAYE code) and pensions will normally have tax deducted at source under PAYE directly by the pension provider. The PAYE code used for your pension will be adjusted to take account of any other income including any State pension you receive. There is general guidance on the taxation of pensions on HMRC s website at www.hmrc.gov.uk/pensioners/pension.htm. If you think you could be paying too much tax on your pension, there is guidance on HMRC s website at www.hmrc.gov.uk/incometax/overpaid-thro-pension.htm. If you have any queries relating to your tax situation, we recommend that you contact your financial adviser. EXAMPLE (for illustrative purposes only) A customer aged 56 with a personal pension pot of 50,000, and a salary of 30,000 and no other benefits or income. Irrespective of the size of their pension pot, they would be subject to the basic rate of income tax which is 20%. TAXABLE INCOME 30,000-10,600 (Personal Allowance) 19,400 INCOME TAX DUE 19,400 x 20% 3,880 STEP 1 TAKING TAX-FREE CASH ONLY FROM THEIR PENSION POT If this customer takes 25% of their pension pot as tax-free cash, this would not affect any income tax due. 25% of 50,000 = 12,500 (tax-free) Remaining pension pot = 37,500 Total tax due = 3,880 (unchanged)
2015 PENSIONS REFORM YOUR QUESTIONS ANSWERED 9 STEP 2 TAKING AN ADDITIONAL PARTIAL LUMP SUM This customer decides to take an additional 10,000 out of their pension pot in the same tax year. This will be subject to the basic rate of income tax and will be added to their income taking their total income to 40,000 this year. TAXABLE INCOME 30,000 salary + 10,000 lump sum = 40,000 40,000-10,600 (Personal Allowance) = 29,400 29,400 INCOME TAX DUE 29,400 x 20% 5,880 Remaining pension pot = 27,500 Total tax due has increased from 3,880 to 5,880 STEP 3 TAKING A 2ND ADDITIONAL PARTIAL LUMP SUM This customer decides to take a further 20,000 out of their pension pot in the same tax year. This will be added to their income taking their total income to 60,000 this year, and a portion of their income would now be subject to the higher rate of income tax of 40%. TAXABLE INCOME 30,000 salary + 10,000 + 20,000 lump sums = 60,000 60,000-10,600 (Personal Allowance) = 49,400 49,400 INCOME TAX DUE 31,785 x 20% 6,357 17,615 x 40% 7,046 TOTAL 13,403 Remaining pension pot = 7,500 Total tax due has increased from 5,880 to 13,403
10 2015 PENSIONS REFORM YOUR QUESTIONS ANSWERED SUMMARY So, this customer has received 12,500 tax free Total income = 60,000 Total tax paid = 13,403 Amount of remaining pension pot = 7,500 (reduced from 50,000) THINGS TO CONSIDER It s important to remember you ve been saving into your pension plan so that you can use your pension pot to provide you with an income in retirement. Any money you take from your plan will reduce your pension pot and therefore reduce the level of retirement income you could receive. Accessing some or all your pension pot may affect your Annual Allowance (see Question 6). As our example illustrates, it s important to consider the tax consequences of withdrawing cash from your pension pot as you could find yourself paying unexpected rates of tax. Taking your pension in smaller lump sums, spread over different tax years could help manage your tax liability. The law and tax rates may change in the future. These details are based on our understanding of tax law and HM Revenue & Customs practice which is subject to change. The amount of tax you pay, and the value of any tax relief, will depend on your individual circumstances. Please call us on 0370 060 0784 if you have any questions about the changes the Government has introduced and how they impact your pension plan. Call charges will vary. We may record and monitor calls. Alternatively visit our website: www.legalandgeneral.com.
www.legalandgeneral.com Legal & General Assurance Society Limited Registered in England and Wales No. 00166055. Legal & General Assurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Legal & General (Portfolio Management Services) Limited Registered in England and Wales No. 02457525. Legal & General (Portfolio Management Services) Limited is authorised by the Financial Conduct Authority. Registered office: One Coleman Street London EC2R 5AA Q51109 04/15 184675