One of our advisors in our Staines branch met a couple who each had different types of pensions, including final salary pensions and money purchase arrangements.
They were looking for advice and help to work their way through the myriad of pension plans.
One of them was a 59 years old lady. She wasn’t in employment at the time and had a total of nearly £200,000 in four different pension schemes. We checked to see if any of these pensions had any valuable guaranteed benefits, such as Guaranteed Annuity Rates (GARS), Guaranteed Fund Values, protected tax-free cash, or Guaranteed Minimum Pensions (GMP). But none of these benefits were linked to her pensions.
As she had no income, she was not using any of her personal allowance. We advised her to consolidate the four pension plans into a capped drawdown plan (Flexi-access drawdown was not available at that time). Then take all of the tax-free cash (25% of the total fund value) and £10,000 per annum as income. This plan is called a crystallization event, and when a pension fund is crystallized, it means that no further tax-free cash is available.
Capped drawdown allows tax-free cash to be taken with or without taxable income. At the time that this advice was given, the maximum level of income was dictated by the Government Actuaries Department’s tables (GAD rates) and was 150% of the maximum income quoted in the tables.
The client invested the tax-free cash into her and her husband’s ISAs over the next two tax years – pre and post 5th April 2014, thereby preserving the tax-free nature of the investment.
She did not require the full £10,000 per annum; therefore we set up a direct debit of £240 per month back into the same pension fund. This scheme created a second pension fund which is uncrystallised and therefore means that she is building up a further 25% tax-free cash for withdrawal at a later date.
As the client was not working, the maximum pension contribution she could make was £3,600 per annum or £300 per month. As personal pension contributions are paid net of basic rate tax, the maximum amount that she could pay into a pension fund was £240 per month (£300 minus 20%).
This process can continue until she reaches State Pension Age (SPA) at which point we will reduce the level of withdrawal from the capped drawdown pension fund to ensure she stays within her personal allowance.
By careful planning, we have been able to extract funds from the client’s pension plans without her incurring any income tax. This may well continue to be the case throughout her retirement.