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29 August 2014 last updated
Flexi-access drawdown will be used by 130,000 people says HMRC

HM Revenue and Customs have said the new flexi-access drawdown funds will be used by 130,000 people from April 2015 as part of the government's radical change for pensions.

From April 2015 there will be a new way to access your pension using a flexi-access drawdown fund and from the 400,000 retiring each year HMRC estimates about 130,000 will select this option.

Originally the only option for the majority of people was to buy a lifetime annuity exchanging your pension fund for an income. The Budget has changed this and from next year it will be possible to take the whole fund as cash.

Currently it is possible to use flexi-access drawdown or remain in capped drawdown to access a pension fund although this facility has been typically used by people with funds of £100,000 or more.

With the new pension rules these plans are changing and many can be accessed with smaller funds of £30,000 or more after taking the tax free lump sum. Many people will use drawdown to take their fund over time to avoid tax.

 
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Tax risks of accessing pension funds

The first 25% of the fund can be taken tax free as a lump sum from a pension fund and any further cash taken will be taxed at your marginal rate. Saga have estimated that about 15% of people will take the full fund as cash and there is a risk that without the appropriate advise there is be an unexpected tax bill.

The Exchequer is expecting a tax gain from the new legislation and HMRC have estimated the future revenues as follows.

2015-16 2016-17 2017-18 2018-19 2019-20
£320m £600m £910m £1,220m £810m


Without proper tax planning the tax liability could be significant if people take the full fund in one tax year. For example, for someone retiring on £20,000 will be a basic rate taxpayer. If they have a fund of £50,000 they could take £12,500 tax free and the remaining fund of £37,500 taxed at their marginal rate.

Everyone will receive their personal allowance of £10,000 and after deducting the basic rate tax band there will be £15,635 chargeable to higher rate tax at 40%. This means the total tax on the pension fund will be £10,627. This charge could be reduced by spreading the cash payments over two or more tax years so only basic rate tax is paid reducing the tax to £7,500.

Access your fund now

The new pension rules and flexi-access drawdown funds are available from April 2015 when 130,000 people a year are expected to select this option rather than a lifetime annuity.

There are ways of accessing your pension fund now. By accessing your fund you can take your tax free lump sum and rather than buy an annuity, place your fund in a flexible income plan and transfer to the new arrangements without penalty later.

Flexible income plans can be accessed now using a fixed term plan for one year or more allowing time for the new pension rules to be implemented and this route would provide an income from £Nil to the maximum amount allowable by the Governments Actuaries Department (GAD). You can select the income between this range and receive a guaranteed maturity amount at the end of the term.

An alternative would be flexible drawdown access now available even for smaller funds of £30,000 to £100,000 and this option would allow greater income flexibility than the fixed term plan. By selecting a provider with a protected growth fund it would be possible to realise a higher growth rate than cash with a very low volatility to take advantage of the new pension rules and spread cash withdrawals over several years to minimise the amount personal tax paid.

News related stories:
Pension savers to receive free guidance when taking their benefits
Budget time table risks delays for changes to drawdown and annuities
Annuity drawdown plan would offer greatest flexibility at retirement
Fixed term annuity for 1 year offered by providers gives more flexibility
Radical changes to pension annuities announced by Chancellor
Related internet links:
BBC - A third to access flexible pension says HMRC
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