- In the UK, if you have a private pension plan
and currently you have to wait as a minimum
until you are 55 years of age
before you can start accessing the money in your pension
without being penalized.
Now for some workplace pensions, this age could be higher.
Once you get to this minimum age,
what are the tax implications of withdrawing your pension
and how much can you take tax-free?
In this video, I'm going to cover a refresher
on how to get tax relief on your pension contributions.
How you can drawdown funds from your pension pot.
How can small limited company business owners
take a tax-free loan from their pension pots.
And finally buying a lifetime annuity and taxation.
Pensions are a powerful tax shelter.
So in other words you get tax-free contributions
into your pension pot
and any growth in your pot is free from capital gains tax
or any other taxes.
In the current tax share you as a UK tax resident
is able to contribute up to 40,000 pounds per annum
into an approved pension pot tax-free.
And don't forget there is also a lifetime allowance
currently 1,073,000 per the 21-22 tax year.
If you want a more in-depth refresher
on the top three ways to get tax relief
on your pension contributions,
we've done a comprehensive video on this
which you can access by clicking
on the link in the description box below.
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to the accounting and tax academy membership site.
In July of this year, we're opening our doors to everyone.
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- There are in effect two common ways
you can drawdown from your pension.
That is of course once you've reached
the minimum retirement age which is currently 55.
Firstly, you can take a lump sum of up to 25% tax-free.
And secondly, you can buy what is called an annuity.
In other words, a regular income for the rest of your life.
Up until recently, the amount of money you could withdraw
from your pension was tightly controlled by the government
and various legislation but you now have more freedom
as to how you can manage a drawdown or your pension.
For the first time that you as a pension saver
has the ability to control your tax bills
by making controlled and managed pension withdrawals
in some tax years in comparison to others.
So timing your pension drawdown is an available
and effective strategy to help you control your tax bill.
So when you reach the minimum pension age,
you can move some or all of your pension pot
into what is known as a flexi-access drawdown.
This is best explained with a common example.
Paul is 56 and is still working as a higher rate
40% tax payer and has a pension pot
currently worth 250,000 pounds.
He wants to take 10,000 pounds of his pension tax-free
for now as he has passed the minimum retirement age of 55.
So he transfers 40,000 pounds
into a flexi-access drawdown plan and takes 25%
of the 40,000 as a tax-free lump sum, equaling 10,000 pounds
and leaves the remaining 30,000 pounds in the drawdown plan
without taking any additional taxable income.
So Paul has achieved his objective of withdrawing
for himself 10,000 pounds from his pension pot
without having to pay any tax.
Then three years later, he transfers another 40,000 pounds
into the same flexi-access drawdown plan
and takes another 10,000 pounds of tax-free funds.
He leaves the remaining 30,000 pounds in the drawdown plan
along with the other 30,000 pounds from two years ago.
Now giving him a total of 60,000 pounds
in the drawdown plan.
So basically flexi-access drawdown allows you to
take your tax-free lump sum
on its own without any additional taxable income,
allowing you to park the rest of the funds
in the drawdown plan.
And what's more, the 60,000 pounds currently
in Paul's drawdown plan continues to grow tax-free
until Paul decides to withdraw parts or all of it.
And Paul can keep doing this until he has drawn
down all of his pension pot into a drawdown plan
but you need to check with your pension provider
if they offer a flexi-access drawdown.
And if they don't, perhaps you might want to consider
speaking to a professional advisor to switch providers.
UFPLS, wow, a bit of a tongue twister and bless those
civil servant reformers who come up with such acronyms.
UFPLs is similar in how it works to a flexi drawdown
but there is a subtle and effective difference.
Again, let's use Paul's example to illustrate.
So we know Paul has a pension pot worth 250,000 pounds
and wants to take just 10,000 pounds out of his pension,
tax-free for now.
So on the UFPLS, Paul will withdraw 40,000 pounds
and take 25% of this tax-free.
So 10,000 pounds.
The difference is that the remaining 30,000 pounds
has to be taken as taxable income simultaneously.
He can't park it in a flexi drawdown plan.
And let's assume Paul is a 40% taxpayer,
in the tax year he takes the 30,000 pounds.
He'll be subject to 12,000 pounds of income tax
on this withdrawal. Ouch.
So now, can you see why your timing is crucial
if you wants to optimize, if not minimize your tax bill?
Continuing with Paul's example, because he's still working,
he could be subject to the money purchase annual allowance.
From the 6th of April, 2017,
the money purchase allowance was reduced
to 4,000 pounds per annum
but what does this actually mean?
So under UFPLS in the previous section,
Paul withdrew 40,000 pounds in total
from his pension pot at the age of 56.
And as a tax paying employee, despite surpassing
the minimum retirement age of 55,
he can still make further contributions to his pension pot.
Only he will be limited to just 4,000 pounds
gross per annum, hence the money purchase allowance.
This compares to the usual 40,000 pounds per annum
tax-free contribution allowance.
So just be aware of this.
Now, if you run a small business through a limited company,
you can set up and contribute to a pension scheme
called a SSAS, a Small Self Administered Scheme.
An SSAS is a type of occupational pension scheme.
A defined contribution scheme, typically established
by owner directors of small limited company businesses.
They are very common in family run businesses
and are open to all employees
and their family members up to a cap of 11 individuals.
One of the benefits of an SSAS is
that it allows more independent management of it
as a pension scheme in comparison to more
traditional occupational pension schemes, or even a SIP.
So as a result, an SSAS pension scheme
can provide a commercial loan to your company tax-free,
in order to purchase an asset such as a new piece
of equipment or for a variety of other commercial reasons.
But a note of caution, whilst borrowing money
from an SSAS pension scheme may be more attractive
than borrowing from a bank or financial institution.
A SSAS pension scheme cannot give your company
a soft loan with no interest payable
and flexible repayment terms.
There are certain rules that have to be fulfilled
in order to avoid what is known as an
unauthorized payment tax charge.
Head on to our free download which explains these rules
in more detail.
Nonetheless get it right and an SSAS pension vehicle
is a very slick way of channeling contributions,
tax-free into a pot and then using some of those funds again
tax-free to invest in your business.
Historically, the most common option for accessing
your pension pot money was buying what is known as
an annuity.
In other words, you essentially use your pension pot
to buy a guaranteed lifetime income.
Again, let us explain this better with Paul's example.
We know he has 250,000 pounds in his pension pot.
So let's assume Paul is now 60 and no longer working.
So he decides to cash in on his pension
and takes a full 25%.
That is 62,500 pounds as a tax-free lump sum.
For the remainder of the 187,500 pounds,
Paul buys an annuity.
A lifetime income from an insurance company.
Now annuity rates are often linked to interest rates
and in the current climate, as we know,
The Official Bank of England base rate is only 0.1%
at the time of this video, an all time low.
So don't expect annuity rates to be particularly great.
However, let's take a look at what is available
for a single person on a standard basis.
This reputable website sharing pensions.co.uk is
showing rates of around 3.8% to 7% dependent upon your age.
Although actual rates would depend
upon quite a few variables.
Annuities are often maligned by the media
and seen as a calm the idea of lots of retirees
putting their money together.
And those that live longer than average are subsidized
by those who live shorter than average.
And I guess that is fair enough
but the one advantage of a lifetime annuity is just
that it's for your entire lifetime.
And if you do end up living into your nineties or beyond
then at least it provides you with some peace of mind
and dare I say, a reasonable return on your pension pot.
Thanks for tuning in
and I hope you find this content empowering and helpful.
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