Category : UFPLS

Summary of your retirement options

Posted By: Phil Handley DipPFS AwPETR On March 14, 2015 Category: annuities Pension drawdown Tax-free cash UFPLS

Making the right choice with your pension fund has become even more difficult with the introduction of the new reforms. We have summarised the key advantages and disadvantages of the main options. It’s also important to note that you don’t have to make a commitment to one option; you can mix and match to suit your needs. As an example, it might be prudent to take out an annuity to cover your fixed monthly outgoings and use flexi-access drawdown to provide some flexibility.

 AdvantagesDisadvantages
Full cash withdrawal• Access to full pension fund
• 25% tax free
• No restrictions on what you spend it on
• Could be used to reduce liabilities
• 75% taxed against earned income
• Could move you into a higher tax band of 40% or 45%
• Not a lifetime income if all spent quickly
Flexi-access drawdown• Flexibility to take income as required
• Allow you to take income within tax threshold
• Ability to change income to an annuity at a later point
• 25% tax free
• Keeps fund invested give potential growth
• Tax efficient growth on invested fund
• Assets can be passed onto estate
• Investment risk and potential for fund to lose value
• 75% is taxed against earned income on withdrawal
• Could run out if large income taken and you live into later retirement
• Ongoing cost to run with management and platform fee’s
Fixed Term Annuity• Fixed income for a fixed term
• Guaranteed maturity value
• Ability to purchase an annuity in the future
• No investment risk
• Assets can be passed onto estate
• 25% tax free
• Future risk if the guaranteed maturity value may by a lower income than today if annuity rates are worse
• Can’t change the level of income during the fixed term
UFPLS• Flexibility to take ‘chucks’ of income when needed
• 25% with be tax free, 75% will be taxable against income
• Allows continued investment of unwithdrawn funds
• Untaken funds grow tax efficiently
• Investment risk of remaining funds
• 75% of any withdrawn funds taxable
• Low take up from providers offering the facility
• Income/capital is not guaranteed for life
Annuity• Guaranteed lifetime income
• 25% tax free
• Inflation proofing can be built in
• Any untaken funds can be passed onto estate on death (value protection). Only available through certain providers
• Control over assets given up
• No flexibility once taken
• Historic low rates meaning you’d have to live many years to get value back

Using income drawdown to quickly withdraw your pension funds

Posted By: Phil Handley DipPFS AwPETR On February 25, 2015 Category: Investment funds Pension drawdown UFPLS

An advantage of the new pension reforms in April 2015 is to have full access to your pension savings. The obvious disadvantage however is the potentially large income tax bill. 25% will be allowed tax free still, however any of the additional 75% withdrawn will be added to your income tax bill for the year. Those with larger pension funds therefore face a choice. Take it all out and pay higher rate tax (40%) and potentially additional rate tax (45%) on some of the income or withdraw it over a number of years.

The current income tax thresholds are as follows.

tax tables drawdownTherefore any pension fund withdrawn above £41,865 (assuming no other taxable income in the year) will be charged at 40% and additionally at £150,000.

Clearly this wouldn’t be the most tax efficient way of withdrawing funds so what are the alternative options?

Uncrystalised Funds Pension Lump Sums (UFPLS)

This allows you to stay within your existing pension scheme and take ‘chunks’ of money out when required. 25% will be taxable with the remaining 75% charged against income tax. Read our blog on UFPLS for more information

Pension Drawdown

This is where consideration needs to be taken. If the sole intention is to withdraw funds as quick as possible but stay below certain tax thresholds,  care should be given to the choice of investment vehicle. Income drawdown has traditionally been an investment based product,  and as any good financial adviser will tell you, investments should be considered for a minimum of 5 years. Therefore if your fund size is such that you’ll depleate it before this time frame,  the usual investment based approach may be risky.

Investments fluctuate in the short term (up to 5 years). If there is a particularly uncertain period in the stock markets the 5 years after you retire, the value of your pot may be seriously depleted. The advantage of holding investment over the medium to long term should allow for short term fluctuations to be ironed out. Look at this chart of the FTSE 100 since 1985.

FTSE 100 pension drawdown

This highlights the general growth over the medium to long term. However,  there are short term periods of massive decline. The year 2001 to 2003 and the more recent crash of 2007/08. Although pension freedom wasn’t available during these periods anyone with a FTSE 100 fund, who may have adopted a short term withdrawal strategy during this time,  would have seen the value of their funds almost half. Note that following these periods however in the medium term the markets ‘bounced back’. Although this chart solely illustrates the FTSE 100, global markets followed a similar pattern.

An investment based approach with a large equity content could therefore be a risky strategy. The other alternative is to use the flexibilities income drawdown provides,  but choose a more cautious approach.

Funds that contain a higher weighting to perceived ‘less risky’ asset classes like gilts and bonds could be one method, however are still exposed to volatility.

This chart from monevator.com shows the volatility of the main asset classes taking into consideration inflation.

Volitility pension drawdown

It highlights that the least volatile asset class in the short term is cash. If you are wanting to withdraw a similar amount to your starting fund value this is the most likely option.

Cash based drawdown is available through many providers,  either in a Deposit Based fund or Money Market funds which can provide a slightly better performance but are a step up in volatility. Cash doesn’t carry investment risk but does carry inflationary risk meaning the real spending power of it will decrease over time if the interest rate isn’t as high as the increase in the cost of living, usually measured by the Consumer Price Index.

Consideration therefore is paramount when deciding which type of investment your remaining drawdown fund should be placed into. If you are taking financial advice make the withdrawal period clear to your adviser. If you are choosing to set up and manage a drawdown plan yourself, carefully consider the volatility of your chosen investment against the time period of withdrawal.

Uncrystallised Funds Pension Lump Sums (UFPLS)

Posted By: Phil Handley DipPFS AwPETR On February 16, 2015 Category: UFPLS

UFPLS Tax Calculator

Work out your tax liability on withdrawals from UFPLS with our tax calculator.

Updated table for who is currently offering UFPLS – May 2016

Aviva No
Hargreaves Lansdown Yes
Royal London Yes
Prudential Yes – £1000 min withdrawal
Standard Life Yes
Legal and General Yes – but restricted to 2 withdrawals per year
Tilney Best Invest Yes
Alliance Trust Yes
Fidelity Yes – £1000 min withdrawal
Aegon Yes – depending on plan
Scottish Widows Yes – £5000 min withdrawal
AJ Bell Yes
LV No
Equitable Life Yes – £5000 min withdrawal
Skandia/Old Mutual No

After an initial slow take up of UFPLS (see article below), more providers have built this into their propositions. It does come with certain restriction however depending on the provider.

original article FEB 2015

As part of the pension freedom reforms, an additional way was announced, to withdraw pension monies. The official name is uncrystallised funds pension lump sums or abbreviated to UFPLS. This allows ad hoc withdrawals from your existing pension. No need to move to another provider or change funds. The concept is to withdraw money as you do from a bank account. The pension bank account if you will. Nice idea, however it seems difficult for existing pension schemes to implement and full of additional complexities.

The idea sounds simple. Withdraw what you need. 25% will be tax free and the remaining 75% will be added to your income tax bill for the year. Great, where’s my pension bank account cash card I hear you ask. Well, it’s not going quite according to the Chancellors game plan.

For starters there has been an extremely slow take up from existing pension companies to spend millions on the administration and technologies to set such a scheme up. Think of this scenario. Mr Smith want to be flexible with how and when he takes money from his pension. He wants to withdraw money as and when he needs it, leaving the remaining fund to grow. He only wants the odd £1,000 here and there however.

Every time he wants some income it will trigger a lifetime allowance event. Moving money from an uncrystallised (pension accumulation) to crystallised (pension decumulation) stage, requires a test to see if the pension holder has breached the £1.25m pension lifetime allowance limit.

Now, very few people will have the privilege of paying the additional 55% tax for breaching such a limit but none the less, a test is required every time a withdrawal is made. As the remaining fund continues to grow (in a perfect world) there could be instances where someone’s fund has gone over the limits. Pension schemes are required to check every client who withdraws funds, and that they’ve declared to have unused allowance left. It’s hard to think that the majority of companies are going to get involved in the administration of such reporting, thousands of times a month when 5,000 Mr Smith’s want their monthly golf club fee’s. It’s unrealistic to expect a company with no previous withdrawal facilities to adopt such procedures.

Looking at those who are providing UFPLS, there seems to be certain restrictions being put in place. Equitable Life, for example are offering UFPLS but the minimum withdrawal is £5,000.

The next issue concerns where the remaining funds will be invested. The vast majority of people invest in a pension when their younger, they haven’t got any idea where their funds are invested or whether it suits their attitude to investment risk throughout their working career. At retirement, it’s pot luck what their fund size is. The fund type could be totally inappropriate, it could be completely equity based (high risk) or in a dog of a with profits fund. As no financial adviser will be required to assist a client who wishes to use UFPLS, no fund assessment will take place.

Scenario 2 would see a client start to withdraw money after retirement on an ad hoc basis and then find, after a stock market crash that their fund has halved. No one will be liable as no advice is required to withdraw funds this way. It’s not the pension providers’ prerogative to risk profile clients who are using this form of withdrawal so the client is on their own.

For its potential complexities to providers and suitability to users, there are some positives to withdrawal through this method, in the right scenario. If you’re 65 and have a pension pot of £100,000, 25% of this or £25,000 would be tax free if you crystallised the full fund and bought an annuity or went into drawdown. Your maximum amount of tax free fund would always be £25,000 and the remaining £75,000 would be added to you income tax liability on withdrawal.

If however, you used UFPLS you could end up with more tax free cash (over time) and overall fund. Let say you want to withdraw £20,000 per year for the first 4 years, then everything out in the final year and it grows 10% per year.

 

UFPLS

Although the potential growth in this example is probably unrealistic it highlights an increased tax free cash allowance of £8,077 and additional taxable income of £18,231 over crystallising the full £100,000 at outset. An overall better position by making ad hoc withdrawals. That’s the positive, if markets don’t behave, there is a risk you could end up with less.

Some of the major providers are putting their cards on the table regarding this method of withdrawal. AEGON has already called for it to be scrapped and AJ Bell has announced it won’t be offering UFPLS but will offer lump sum withdrawals under flexi-access drawdown. Suffolk Life and Zurich announced that they are to offer uncrystallised fund pension lump sums to their clients.

From our experience at Compare Drawdown the restrictions being put on UFPLS by providers is putting many people off using it. Drawdown allows a lot more flexibility and there are no restrictions on withdrawal. If taken advice it also provides piece of mind that the funds are invested appropriately.

Like the idea of UFPLS but your existing provider doesn't offer it?

We’re in contact will all the provider who do offer UFPLS. Talk to us and we’ll help you find the best providers for your personal requirements.