Included in this section;

• Trivial Commutations
• Pension flexibility

Trivial commutations (cashing in your whole pension pot)

Trivial commutation only applies to Defined Benefit Schemes (also known as final salary pensions). If you have been employed in a number of different organisations and contributed to works pensions for a short time in each, or have worked for only a short time, you may have only saved small amounts towards your pension. If the total value of all your pension pots is less that £30,000, you may be allowed to take this as a lump sum (remember, anything over 25% of the total is taxable), this is known as ‘trivial commutation’. With final salary schemes, you don’t have your own ‘pot’; the valuation of benefits in a final salary scheme for testing against the triviality limit (£30,000) is based on the pension you could receive multiplied by 20. However the lump sum that is then paid to you is broadly equivalent to the amount that would be available to transfer to a new scheme.

An occupational pension scheme benefit worth £10,000 or less can also be taken as a small pot lump sum separately from the triviality rule above. In addition, individuals over the age of 55 can also claim small pot lump sums from up to three personal pensions worth £10,000 or less, without having to purchase an annuity. Taking a small pot lump sum will not trigger the rules around the money purchase annual allowance.

Note – working out how much your pension funds are worth for this purpose may not be straightforward, especially if you have an occupational pension scheme, so speak to your pension provider or the Pensions Advisory Service.

Pension Flexibility from 6 April 2015

The Key Changes

The changes mainly affect people with defined contribution pensions, more commonly known as money purchase schemes. These include individual, group personal, stakeholder pensions, most additional voluntary contribution schemes (AVCs) and self-invested personal pensions (SIPPs). This means the changes apply to you if you have built up one or more ‘pots’ of cash or investments in pensions and you have to decide what you do with it. The changes mostly do NOT cover defined benefit schemes, often known as final salary pensions. These are pensions where the money you take from them is worked out based upon how much you earned with an employer and how long you were a scheme member. The rules of some pension schemes do not allow withdrawal of some sums, even though the tax rules now allow them. Pension providers have been permitted by law to override their own rules, but they do not have to do so. This means that your pension provider might refuse to do some of the things that the general pension rules allow. If you are unsure which type of pension you are paying into or want to know what you will be allowed to do, ask your scheme provider.

The main changes include:

• Flexible access to pensions from the age of 55
• Freedom in the way ‘tax free’ cash can be taken
• Removing restrictions on ‘drawdown’ arrangements
• Abolition of the 55% pension ‘death tax’

The Government has also guaranteed that everyone with a defined contribution pension will be offered free, impartial guidance. This aims to cover the range of options available, helping you to make sound decisions and get the most from your choices. This ‘Pension Wise’ service is available from:

• The Pensions Advisory Service (TPAS)
• Citizens Advice
• Pension Wise and the Money Advice Service (MAS)

Contact details are at the end of this section.

Flexible access to pensions from the age of 55

Up to now, most people who have saved in a pension scheme have then used the money to buy an annuity which gives a guaranteed income in the form of a pension. Since April 2015, you have more options. You can decide how much and when you take money out of your pension (often called a ‘pension pot’). In theory and whilst the ‘pot’ lasts, you will be able to take out as much as you like, whenever you like. The three main choices available will be:

• To withdraw all of the money in one go
• Leave it in the scheme and take a regular or occasional income
• Buy an annuity or enter into a ‘drawdown’ arrangement

Or

• A combination of all three.

The tax implications of these options depend on your own personal circumstances. Taking benefits in any of the ways highlighted above will mean that future contributions to money purchase plans could be restricted. Essentially, they will be limited (with exceptions) to a maximum of £4,000 per year. If you think that this might impact on your plans, we recommend that you seek independent financial advice.

Freedom in the way ‘tax free’ cash can be taken

Most people can already take up to 25% of their pension ‘pot’ as a tax free cash lump sum. Since April 2015, how you choose to do this has changed. The options now are:

• Take 25% of the pot tax free in one go, meaning any further withdrawals will be taxed as income;

Or

• Take 25% of every cash withdrawal tax free, with the remaining 75% taxable as income.

Taxation in more detail

If your scheme provider allows, you can use your pension pot ‘like a bank account’ rather than buying an annuity. Under these new rules you have two options, you can:

• take part of your fund
• take all of your fund

But you will need to watch out as you could have to pay tax on what you take out – so it’s not as easy as when you take money out of a bank account! If you choose to take part of your fund, you will first decide whether you take 25% of the whole fund as a tax free amount or 25% of each withdrawal. Whichever you choose, any amount taken in excess of the 25% will be taxed under Pay As You Earn (PAYE). If you choose to take all of your fund, 25% will be tax free and the remaining amount will be taxed under PAYE. In most cases these payments will be taxed without consideration to any other income you may have during the tax year. This will mean that you could pay too much tax (an ‘overpayment’) or not enough tax (an ‘underpayment’) by the end of the tax year.

How your pension payment is taxed

Tax is taken using the PAYE system. If you are or have been an employee, you may recognise this as similar to the way your employer took tax off your wages or salary.

How your pension payment is taxed depends on whether:

• you decide to take part or all of your fund
• you have other PAYE income and
• you receive the State Pension.

As above, only part of your pension payment might be taxable, depending on how you choose to use your tax free cash sum. The following comments apply only to the part of the sum that is to be taxed. The pension provider uses a PAYE code number, but this is worked out on an ‘emergency’ or ‘month1/week1’ basis (see below for more detail on this); unless you give them an ‘in year’ P45. If you have stopped work you will get a P45 from your previous employer. It will show how much you have earned and how much tax you have paid since 6 April, and what code number your employer has been using. You might also get one from another pension provider, if you have taken everything out of a single pension pot. If you give your pension provider a P45, they should use the code number from it.

Getting your tax back

The system differs depending on whether you have;

• Taken all of your money out of a pension pot
• Taken part of your money out of a pension

If you take all of your money out of a pension pot

If you pay your tax under PAYE you can claim the overpaid amount back during the tax year. Your scheme provider should provide you with a P45 showing details of the payment. You may have to send this form to HMRC when you claim a repayment.

If you have no other income or just receive your State Pension, use form P50Z.

If you have other PAYE income, use form P53Z. You can either telephone HMRC for the forms (telephone number given at the bottom of this section), or search www.GOV.UK for P50Z, P53Z.

This ability to claim back tax during the tax year applies if you have taken everything out of a pension pot. For instance, you had £20,000 with XYZ Mutual and have taken all of the money and tax has been taken under PAYE. There is nothing left with XYZ Mutual (though you might still have another pension pot – say, £10,000 with ABC Investments – that you have not touched; that does not matter).

If you do not send in a claim during the tax year, HMRC should look at all of your PAYE records after the end of the tax year. Where there has been a tax overpayment of any amount or an underpayment of at least £50, HMRC will send you a ‘P800’ calculation. This should pick up on overpayments that haven’t been claimed within the tax year. But if the system fails, you may not hear from HMRC or you may get a P800 calculation that is incorrect, so you need to try to understand your situation for yourself.

If you usually complete a self-assessment tax return, you will have to wait until the end of the year to balance your account.

If you have taken only part of your money out of a pension pot

Tax overpayments and underpayments will be dealt with under the normal PAYE rules. This means that you will not be able to claim back tax during the tax year if you have not taken everything out of a pension pot.

So let’s say you had two pension pots, one of £20,000 and the other of £10,000. You have taken out £5,000 from the first, so there is still £15,000 left in it. Although your pension provider will take some tax under PAYE and tell HMRC about the payment and tax deduction, they will not issue a P45 as you still have money left in the pot. HMRC should issue a code number to the pension provider in case you take any more payments from it during the tax year (in which case the PAYE system might give you a refund of earlier tax paid), but normally you will have to wait until after the end of the tax year to get back any overpayment.

There is an exception to the above which applies if you only intend to take a single part payment in a tax year. In that instance you can reclaim any overpaid tax during the year using form P55.

As above, if you haven’t made a claim during the tax year HMRC should look at all of your PAYE records after the end of the tax year. Where there has been a tax overpayment of any amount or an underpayment of at least £50, HMRC will send you a ‘P800’ calculation. This should pick up on overpayments that haven’t been claimed within the tax year. But once again if the system fails, you may not hear from HMRC or you may get a P800 calculation that is incorrect, so you need to try to understand your situation for yourself.

If you usually complete a self-assessment tax return, you will have to wait until the end of the year to balance your account.

Pension Wise

www.pensionwise.gov.uk

The Government’s guidance service. Visit the website for general information on taking money out of a defined contribution pension.

T: 030 0330 1001

For a telephone or face to face appointment, between 8am and 10pm, Monday to Sunday. Calls cost the same as a normal call - if your calls are free, it’s included.

The Pension Advisory Service

www.pensionsadvisoryservice.org.uk

T: 0300 123 1047

For other pensions help, particularly with defined benefits pensions.

Money Advice Service

www.moneyadviceservice.org.uk

Free and impartial money advice, set up by government

T: 0800 138 7777

Monday to Friday, 8am to 8pm Saturday, 9am to 1pm