Q. I am about to cash in my smallest pension pot, which after tax will give me just enough to repay my outstanding mortgage of £15,000. Other than the tax situation, and the fact that I am spending some of my retirement income now rather than when I retire, both of which I understand, are there any other implications I should be aware of before doing so?
A. Any person accessing pension benefits using the new pension flexibility rules, which you appear to be doing, has a reduced annual allowance for pension contribution purposes. This is called the Money Purchase Annual Allowance and restricts the maximum you can pay into your pension plans from £40,000 per annum to £10,000 per annum. For many people this new limit is not of much consequence, as they do not intend to pay more than £10,000 in any one year. But if you are a late starter making pension contributions, sometime these allowances are useful ways to top up your savings in a tax efficient manner. One thing you absolutely do need to be aware of is that if you do cash your pension in as suggested, you have a duty to notify all of your other pension providers that you have done so within 3 months of the transaction. Failure to do so can lead to fines being levied by HMRC.
Q. I am 74 and my pension drawdown adviser is telling me that there may be a “Benefit Crystallisation Event” on my fund in a few months. What are they talking about?
A. Benefit Crystallisation Events (BCEs) are occasions when your Pension Savings are tested against the “Lifetime Allowance”, which has been around since 2006. For most people this is at the point that you draw benefits from your occupational scheme, or buy an annuity. However, there are some 12 different BCEs, many connected with income drawdown. In particular, there is a further test when you get to age 75. If your fund value is higher than it was when you went into drawdown, despite any income you have drawn from the fund, then the increase in value will be tested against your remaining Lifetime Allowance. This is intended to deter people from taking their tax-free lump sum but no further taxable income. The tax charge would usually be 25% of the excess over the remaining Lifetime Allowance. There are some things to discuss with your adviser. You could draw some income (subject to tax) to reduce the growth. If your 75th birthday is after April, you could take out one of the “Transitional Protections” to maximise the Lifetime Allowance available to you after it drops from £1.25m to £1m on 6th April. Also, if your pension is your drawdown fund, and your drawdown started before April 2006, it will not be subject to the Lifetime Allowance which came in at that time. I suggest you discuss the issue with your adviser in plenty of time to take action before both the tax-year end and your 75th birthday. This would also be a good time to review the nominations and expression of wishes you have given to the plan provider in the event of your death.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
