I have just finished reading an interesting summary of the impact of retirement planning changes to be introduced from 6th April 2015.
Readers will know that the rules change significantly next April with the ability for a pension plan holder to take the whole of their pension fund as a lump sum (albeit with the excess over the tax free cash figure of 25% being potentially taxable).
The author of the piece I have just read (Andrew Tulley at MGM Advantage) makes the very important point that these changes may have put the planning market into a state of flux.
People might defer making a decision about how they take their pension plan benefits because of these changes.
Andrew also makes the point that it is possible to take an entitlement to tax free cash lump sum now and then defer making a decision about the balance of the fund until next year.
We have in the last 24 hours dealt with two examples of this where the pension plan holder is taking his/her entitlement to tax free cash and then leaving the balance of their pension fund invested (more on this later) until next April when the rule changes kick in.
This is not without risk and it is worth noting that;
• Once you have taken the full entitlement to tax free cash you have “crystallised” the whole of your pension fund and any lump sum payable on death is then taxed at 55% (rather than being tax free on death where the fund is un-crystallised);
• There will be charges to pay to the provider of the pension plan who is paying the tax free cash and retaining the balance of the fund (but then there were probably charges being paid in the original pension plan);
• And in deferring making the decision for what is effectively less than 10 months, the inclination will be to keep the balance of the fund in cash (to avoid investment market volatility) and thus miss out on potentially greater returns from the investment markets;
• Some advisory firms have strict rules about the minimum level of income drawdown products (once you have taken tax free cash you are effectively in income drawdown) although we hope we take the more client centric view that suitability is at individual level rather than any kind of broad brush approach.
So whilst the best thing to do might be to defer making any final long-term decisions until all the details are known, there is really nothing to stop someone accessing their tax free cash now and deferring making the decision about what to do with the balance of their pension pot if they want to.
