02 October 2017
Accessing your pension savings tax efficiently
Since 2015 it has been possible to access pension savings more flexibly, with greater access to your funds upon reaching 55, and more options on how they are drawn.
First of all, let’s get familiar with the terminology of the different options.
The first option is to draw a 25% tax-free lump sum from your fund, which is known as a Pension Commencement Lump Sum (PCLS), after which your fund can go into drawdown, with the remaining funds drawn down as and when needed, with those drawdowns being subject to tax.
From 2015 there is also a second option, known as Uncrystallised Fund Pension Lump Sums (UFPLSs). This is available to anyone over 55 who has not yet accessed any funds from their pension savings. With this option, 25% of each lump sum withdrawal is tax-free, with the remainder subject to tax. It therefore spreads the 25% tax free lump sum across all withdrawals from the fund, rather than it all being taken at the start.
So which is best? The answer to this depends on your personal circumstances, the amounts you plan to withdraw, and your other earnings.
If you decide to start accessing your pension while still working, it will often be best to use the more traditional option of taking a PCLS. This will especially be the case if you are already a higher rate taxpayer. You don’t have to access the whole 25% tax-free amount in one go – you could spread it over a couple of years to supplement your other income (for example, someone with a £300,000 pension fund could take a PCLS of £25k per year for 3 years). If you plan carefully, then you should be able to start drawdown of the remaining fund once you stop working, to avoid paying higher tax rates on the pension income.
In contrast, if you stop working before you start accessing your pension then UFPLSs could be advantageous. For example, you could choose to draw an UFPLS of £16,000 per annum, of which £4,000 (25%) would be tax-free and £12,000 would be taxable. Assuming you have no other earnings at that point (for instance if you take early retirement) then you can utilise your £11,500 personal allowance against the taxable part and would pay very little tax.
In summary, there are now more options than ever, and when planning for retirement it is wise to consider the tax implications to ensure best use of those hard-earned pension savings.
If you would like further advice on this matter, then please contact me.
- Since 6 April 2015 there are now various options for accessing pension savings
- You can draw a 25% tax-free lump sum, and then go into (taxable) drawdown
- Or you can take uncrystallised pension fund lump sums which a partly tax-free
- The best option depends on your other income, and the amounts you wish to draw