Maintain your annual allowance to access 25% of your pension fund as a tax free lump sum
The government have announced that if pension benefits are drawn after April 2015 the current annual allowance of £40,000 (the amount of pension contribution that will benefit from tax relief) will automatically reduce to £10,000 per annum. This will render pension contributions largely inefficient for those who want the flexibility of being able to draw their lump sum whilst continuing to make sizeable pension contributions.
The reduction is primarily designed to lower the risk of people recycling their tax-free lump sum, by reinvesting it into a new pension to receive further tax relief. This of course seems sensible, especially given the tax loophole that the Chancellor would have opened up without the reduction being in place.
But it has the consequence of restricting the retirement planning of those who simply want to enjoy spending their lump sum whilst continuing to make bona fide pension provision.
How can you avoid the reduction whilst maintaining the access flexibility of drawdown? The answer is to simply stay within the current legislation until the new flexibilities become an absolute necessity.
The government has been quick to announce that they don’t want the new reduced limit to affect those already in drawdown. To avoid this consequence the answer is to place at least £1 of your pension into drawdown before April 2015. Not only will this give you the opportunity to draw all of your lump sum in the future but it will also maintain your £40,000 annual allowance.
However, a word of warning. This action can only be taken within certain drawdown contracts. If you have a segmented drawdown contract (typically older than more mainstream contracts) this course of action will not work.
Speak to Provisio on 01462 687337 to find out what options are available to you.