Case study: Taking your whole pension fund as a series of income payments
"I just want to take my whole pension now without paying too much tax"
- 55 Years old
- Still in full time work and earning £25,000 a year
- Has a company pension
- Has a personal pension pot of £60,000
- Wants all her tax-free cash upfront
- Wants to take the whole pot tax-efficiently
A retirement solution
Janet has a personal pension pot, as well as benefiting from a company pension scheme, and her State Pension from age 66.
Janet feels confident that her company pension and state pension will provide her with all the income she will need in retirement and so would like to cash in her smaller pension pot of £60,000.
Janet plans to use the tax-free cash to buy a new car and would like to use the rest of the pot to help her youngest daughter through university.
As Janet is still in full time employment, if she was to take the whole pot as one lump sum payment, she would end up paying higher rate tax on part of this lump sum. The reason is, although 25% of the fund would be payable tax-free, the rest would be taxable at Janet’s marginal rate of tax.
This taxable part, £45,000, would be added to her earnings of £25,000 for the tax year, giving her total income for the year of £70,000. To avoid this situation her adviser recommended she should take the payment over a three-year period.
Janet could have opted to take the fund as a series of Uncrystallised Funds Pension Lump Sums (UFPLSs), allowing her to take the money straight from her pension. However, this would have meant that her tax-free cash would be spread across the three years rather than all being paid out to her at outset. For this reason, her adviser doesn’t feel this option is appropriate.
Janet could opt for flexi-access drawdown, but this would mean keeping the savings in a cash type fund, due to the short investment term and her attitude to risk being low. This option may involve unnecessary additional costs which she feels inappropriate for the short time scale and taking into account her low attitude to risk.
Janet decides to purchase a three-year CanRetire Fixed Term Income Plan. In the first year she will receive all her tax-free cash (£15,000) which she will use to buy a new car. She will also receive one years’ income payment of £15,000, which will be subject to the basic rate tax threshold which she will use to help her daughter.
Janet, will then receive £15,000 in each of the remaining two years, which maintain the basic tax rate threshold for both years.
The figures used in this example are for illustrative purposes only.
At the end of the term, Janet will have withdrawn her entire fund without paying any higher rate tax. When Janet reaches State Pension age she can fully retire on her company and State Pension benefits.
With the CanRetire Fixed Term Income Plan (FTIP), Janet can take all of her tax-free cash at outset, while taking the rest of her pension pot in a tax-efficient low investment risk environment.
The FTIP does not pay an income for life and where a Guaranteed Maturity Value (GMV) is paid at the end of the term this may not be enough to provide you with the same level of income had you bought a lifetime annuity at outset rather than investing in the FTIP.
Withdrawing all your pension benefits may affect your eligibility to certain means tested benefits.
Any income taken from the FTIP will reduce the amount that can be paid into a money purchase pension each tax year to £10,000. This is known as the Money Purchase Annual Allowance (MPAA).
Who is it suitable for?
- Aged 55 or over
- Have a minimum £10,000 to invest (after any tax-free cash has been paid)
- Want guaranteed income and/or growth for a fixed term
- Those looking for a level or escalating income (0.1%-10%)
- Want to access their tax-free cash at outset
- Want a death benefit for their beneficiary(ies)
You should speak to a professional adviser to ensure that FTIP is suitable for you.