Fortitude Financial Planning

Pension Planning

Don’t risk getting burned by a surprise tax bill!

It is probably no surprise that the world of pensions has paradoxically become much more complex since Pensions Simplification came into effect from 6th April 2006.  One of many new terms to emerge was the “annual allowance”, basically the maximum amount people are allowed to pay into their pension pots each year.  For most, this maximum has been set at £40,000 since the 2014/15 tax year.

The Finance Bill 2015, however, provides that from 6th April 2016 the annual allowance for those earning above £150,000 is to be reduced on a tapering basis so that it reduces to £10,000 for those earning above £210,000.  For every £2 of income above £150,000, an individual’s annual allowance will reduce by £1. 


Now, if you earn less than £110,000 you may breathe a sigh of relief because (at least for the moment!) you will be unaffected by these provisions.  The figure of £110,000 is designated as the “threshold income”, defined as the total amount of income for the tax year on which an individual is subject to income tax:

  • less certain allowances and reliefs, e.g. excess tax relief under net pay pension schemes
  • less any contribution made by an individual to a “relief at source” pension
  • plus the amount of any employment income given up for pension provision as a result of any salary sacrifice or relevant flexible remuneration arrangement made on or after 9 July 2015

For those fortunate enough to be affected, read on…

Here we need to introduce another definition, that of “adjusted income”. You will see from the information given above that the tapering of the annual allowance begins to ‘bite’ from £150,000 providing that you also exceed the “threshold income” figure of £110,000. Adjusted income is defined as:

  • the total amount of income for the tax year on which an individual is subject to income tax (as above)
  • less certain allowances and reliefs, e.g. excess tax relief under net pay pension schemes, gifts to charities and trade losses
  • plus any pension scheme tax relief deducted in the previous bullet-point
  • plus any employee pension contributions deducted from gross salary (net pay arrangements) in the tax year the payment is made
  • plus the value of any employer contributions (which includes any employer contributions as a result of a salary exchange arrangement) for the tax year
  • less any lump sum death benefits paid to individuals in the tax year which were taxable at the individual’s marginal rate (i.e. taxable lump sum death benefits received on or after 6 April 2016)

So how might this actually work, in practice? I often find that an example can help:

Let’s say that Emma has the following income in the 2016/17 tax year:

Income (less allowable reliefs and deductions)   £130,000

Dividend income   £10,000

Interest   £2,000

She makes employee pension contributions of   £10,000  (paid through the net pay arrangement) to her employer’s pension scheme

and her employer contributes   £15,000

Emma’s “adjusted income” is therefore £167,000 (being the sum of the figures above) and she will be subject to the tapered annual allowance.

She loses £1 of allowance for each £2 in excess of £150,000 so her annual allowance is reduced by (£17,000/2) = £8,500. Her new tapered annual allowance is therefore (£40,000 – £8,500) = £31,500 for 2016/17.

As with so many things, especially those which purport to be “simple”, expert guidance is inevitably going to prove beneficial.

Please contact us if you would like to discuss whether and how we can help you.


We have written before about the new pension legislation that is due to come into effect from April 2015. On the whole the legislation is welcome, but what do the changes actually mean?

How much income can I take? Can I spend my entire pension?

You may have read extravagant headlines such as ‘Pension pots can be used to buy Lamborghinis’ over the past year. Sound appealing?

From 6th April 2015 you will be able to draw your entire pension fund out as income in one go. But the big question is – why would you?

  • 25% of pension can be drawn as a tax free lump sum but the balance (75%) will be subject to income tax – significantly reducing the actual cash in your pocket!
  • What will you live on in retirement?

For the majority this change will not mean extravagant purchases or world cruises but welcome flexibility regarding how and when you draw income.

What options do I have at retirement?

You are able to draw up to 25% of the value of your pension plan tax free. The balance can only be used to provide you with an income. Broadly speaking three options will be available from 6th April 2015;

  • Flexi-access Drawdown – will allow you to take as much income from your pension fund as you wish having already withdrawn the tax-free cash. Any income drawn will be subject to income tax.
  • Uncrystallised Funds Pension Lump Sums (UFPLS) – will allow individuals to make withdrawals from their pension fund as and when they wish. Each withdrawal is regarded as part tax-free cash (25%) and part taxed income (75%).

Both of the above are essentially different mechanisms to achieve the same thing.

  • The third option is to purchase an annuity. An annuity provides a guaranteed income for life offering both simplicity and certainty.
How much can I contribute to my pension?

You are currently able to pay pension contributions of up to £40,000 per year into a pension plan. This limit has changed several times but for the majority of people it will remain as is throughout 2015/16.

However (there is nearly always a BUT….), this limit will be reduced to £10,000 per year should you draw income, via Flexi-access Drawdown, or any benefits via UFPLS post 6th April 2015.

What happens when I die?

Simply speaking if you die before the age of 75 any death benefits payable (whether income or a lump sum) will be paid to your nominated beneficiary free of tax. This is a vast improvement on the current 55% tax charge which applies to lump sum death benefits payable once you have drawn your tax free lump sum.

The position post 75 is less favourable, albeit still an improvement on the current rules. If death benefits are drawn as an income this will be subject to tax at your beneficiary’s highest marginal rate. If death benefits are drawn as a lump sum they will be taxable at a flat rate of 45%, reducing to your beneficiary’s marginal income tax rate, from the 6th April 2016.

All this means that Financial Planning is essential

It is clear that anyone looking to take benefits from their pensions will have a lot to consider if they are to make an informed decision about the most appropriate course of action including:

  • How important is it for you to leave your pension fund to a beneficiary rather than secure a guaranteed pension in your lifetime?
  • How long do you need your pension income to last and how much income can you take, therefore, without risking running out of funds?
  • Should you secure a base level of income for your lifetime with a proportion of your pension fund whilst retaining flexibility to use the balance in accordance with the new rules?

It is clear that those making such decisions will have to prioritise conflicting objectives. It is also clear that making assumptions about life expectancy is pivotal to the process; and, with very few exceptions, it is impossible to make an accurate prediction.

We are convinced that having a Lifetime Cashflow, in which the likely outcome of differing scenarios can be illustrated, is essential for the decision making process. We help our clients understand the possible consequences of the various options available to them so that they can sleep at night in the knowledge that they have chosen wisely.

Please contact us if you would like to discuss whether and how we can help you.


Pensions are changing, again!

Earlier this year the Chancellor’s Budget announcement of a radical reform of pensions surprised nearly all the pension experts. The reforms provide more choice, however this increase in choice brings with it a significant increase in complexity (the explanatory notes run to 60 pages!).

The Taxation of Pensions Bill

On 14th October 2014 the government published the Taxation of Pensions Bill, which will change the tax rules to allow individuals aged 55 and above to access their defined contribution pension as they wish from April next year.

Chancellor of the Exchequer George Osborne said:

“People who have worked hard and saved all their lives should be free to choose what they do with their money, and that freedom is central to our long term economic plan. From next year they’ll be able to access as much or as little of their defined contribution pension as they want and pass on their hard-earned pensions to their families tax free.”

From April 2015 the proposed benefits available from a money purchase arrangement will be:

  • A Lifetime Annuity, although some of the current restrictions on Lifetime Annuities will be removed, they will still have to be paid for life and at intervals of 12 months or less, but:
    • There will be a more widespread facility to reduce an Annuity in payment;
    • The requirement that the member must be offered the Open Market Option is withdrawn (but may be offered);
    • The 10-year limit on Guaranteed payment periods is scrapped (so the Guarantee may be of any length).
  • Capped Drawdown
  • Flexi access Drawdown
  • Short-term Annuity – as now, an Annuity purchased by a Drawdown fund for a period of up to 5 years;
  • An Uncrystallised Funds Pension Lump Sum – originally shortened to UFPLS which has since morphed into the rather delightful acronym FLUMPS
  • A Scheme Pension
  • A Pension Commencement Lump Sum (available with the Lifetime Annuity, Drawdown or Scheme Pension).

If you are contributing to, or have accumulated pension savings in, one or more “defined contribution” arrangements (i.e. pretty much any pension arrangement other than a company final salary scheme) then these reforms will probably affect you, so now is the time to start planning.

Please contact us if you would like to discuss whether and how we can help you.


Changes to Pension Death Benefits

In September the Chancellor announced that, with effect from April 2015, individuals will have the freedom to pass on their unused defined contribution pension (pretty much any pension arrangement other than a company final salary scheme) lump sum to any nominated beneficiary when they die, rather than paying the 55% tax charge which currently applies to pension lump sums passed on at death.

However further analysis indicates that the proposed reforms to pensions death lump sums and withdrawals may not necessarily lead to the significant differences which have been predicted in recent media coverage.

Our take on the rules is that where investors die before age 75 their pension monies can be paid tax-free. However, where death occurs after 75 the lump sum will be taxable (at a rate of 45% in 2015/16 and then taxed at the beneficiary’s marginal rate from 2016/17 onwards).

According to the Office of National Statistics in 2013, 141,932 people died between the ages of 55 and 75, with 389,360 dying after age 75. On this basis, for every investor who passes their benefits on tax-free, there will be almost three where the surviving beneficiary will be potentially liable for taxation.

While it is still not clear how the beneficary’s ‘marginal rate’ taxation will work in practice our view is that it will be added to any other income earned by the beneficiary. If we are correct, then higher and even additional rate taxation could be applied to any lump sum withdrawals.

If you wish to discuss how these changes might affect you and whether you should be taking any action please call us.

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We have written before about the way certain pension providers charge a lot of money for their pension plans.  The topic is, once again, on the media’s radar with interesting stories both on Moneybox and in the Telegraph in recent weeks. Much of what was said applies to only a few people but there is no doubt that the fees charged for pensions and investments are poorly understood and often very difficult to check. Read more →

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According to a February 2013 survey of over 2,000 UK adults, conducted by YouGov on behalf of Duncan Lawrie Private Bank, 38% of respondents who are pension savers and who have at least one private pension pot, have never reviewed their plan, while 14% have not done so in the last three years. Read more →

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The cost of securing an income in retirement has increased by almost a third since 2009, statistics from the Office of National Statistics (ONS) have revealed. Read more →

Beware the pension liberation front

Despite the best efforts of financial services regulators there are still quite a number of unscrupulous people operating “under the radar” to perpetrate scams on the unsuspecting or unwary.  So be careful if you are approached by someone offering to help you to unlock money that is tied up in your pension fund because they may be leading you into a fraudulent arrangement. This could result in your fund suffering punitive tax charges and high transaction fees.

Read more →