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One lump or two?

20 October 2014

Withdrawing tax-free cash will be a simpler process from April.

Last week the government announced plans to give savers greater freedom in how they access tax-free cash from their pension from April next year.

Currently, 25% of a pension can be paid tax-free, but it normally has to be paid as one lump sum within 18 months of the member taking their pension income.

The Taxation of Pensions Bill sets out details of how members of a defined contribution scheme will be able to dip into their pot when they like and take 25% of the withdrawal tax free. The remaining amount will be taxed at the individual’s marginal rate. It means that people will have more freedom to decide how and when to take tax-free cash from their pension.

Currently, if people want to take smaller portions of tax-free cash, they have to go through a process known as ‘phased drawdown’. This involves transferring partial amounts of pension into separate drawdown contracts. Under new proposals, people will be able to simply withdraw smaller amounts directly from the fund without having to enter drawdown or buy an annuity.

This latest reform is part of wider measures designed to give people more freedom to do what they choose with their pension and follows the recent announcement of the abolition of the 55% ‘death tax’ for inherited pension funds.

Chancellor George Osborne said: “For some people an annuity will be the right choice whereas others might want to take their whole tax-free lump sum and convert the rest to drawdown. We’ve extended the choices even further by offering people the option of taking a number of smaller lump sums, instead of one single big lump sum.”

Ian Price, Divisional Director at St. James’s Place, commented, “It’s clear that the changes announced by the Chancellor are making more individuals consider funding for a retirement via pensions. A recent survey by the National Association of Pension Funds found that 28% of people are more likely to start saving, or save more, into a pension since the changes were announced in the Budget.”

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

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