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How to take pension income

Pension income can be taken in a multitude of different ways, particularly since pensions freedom were introduced in 2015.

(The following descriptions of pension income options for each type of pension listed might also be subject to specific rules set by a pension’s administrators).

A pension transfer to a pension that offers flexible income options might be a subject to discuss with a financial adviser (often the case with Defined Contribution occupational schemes).

If you want to discuss pension transfer options contact Cambridge Pensions.

Defined Benefit pension income drawdown options

From April 2015 the only pension benefits available from a Defined Benefit pension will be:

Scheme Pension

  • This is the ONLY option available for a defined benefit pension (although you can take a PCLS too, see below).
  • A scheme pension is a secured pension, meaning income received cannot go down and that it must always meet its member liabilities.

It is possible to transfer out of this type of pension and into a pension that benefits from flexible income options from age 55 (such as a SIPP), but you will need to obtain professional advice before being allowed to do this if the amount to be transferred is greater than £30,000. Contact Cambridge Pensions if you need to discuss this


Defined Contribution pension income drawdown options

Uncrystallised Funds Pension Lump Sums (UFPLS).

  • Single or multiple withdrawals can be made.
  • Each withdrawal will consist of 25% tax free and the remainder taxable at your marginal rate.
  • After taking UFPLS, your pension contribution allowance will reduce to £4,000 each year.

Flexi Access Drawdown FAD

Income Drawdown allows you to choose the amount you wish to draw from your pension pot every year, the pot decreases with every withdrawal but the money left invested could grow depending on your fund performance.

You could;

  • take all of your tax free cash (usually 25%) in one payment and leave the remaining pot invested and withdraw as and when you need it. All future withdrawals will be taxed at your marginal rate.
  • or
 ’Phase’ Drawdown; typically taking a mixture of tax free and taxable withdrawals, or,
 withdraw all your pension pot as one single payment, 25% tax free and the remainder taxable at your marginal rate.

Annuity

An annuity is an insurance contract which guarantees an income either for a fixed term or for life. There are different types of annuities available to choose from depending on your needs including the ability to add spouse/civil partners/dependents benefits.

Options can include;

  • Level - offering an unchanging amount from outset
  • or Escalating - offering an increasing amount per year, often affiliated to something such as an inflation rate measure.

The MPAA rules will be triggered where a flexible income annuity is used.

Capped Drawdown

  • Only available for those that were in capped drawdown before 5 April 2015. After this date you cannot start a new capped drawdown arrangement (including beneficiaries/dependents).
  • Those with a scheme set up prior to April 2015 can take a maximum of 150% of GAD (Government Actuary’s Department) every tax year.
  • If you take more than this then the MPAA (money purchase annual allowance) is triggered, which means the amount of money purchase pension you can contribute to your pension each year is reduced from £40,000 (plus carry forward) to £4,000 (no carry forward).

Pension Commencement Lump Sum PCLS

This is when you take your tax free lump sum entitlement by itself. This is available to defined contribution and defined benefit pensions.

Scheme Pension

  • This is the ONLY option available for a defined benefit pension (although you can take a PCLS from a DB pension too, see above).
  • Scheme pensions can also be bought with funds from a defined contribution pension
  • A scheme pension is a secured pension, meaning income received cannot go down and that it must always meet its member liabilities (no deficit can arise in a money purchase scheme).

For further assistance on how to take your Pension income please contact Cambridge Pensions today.

Trivial commutation and small pots can be used for amounts lower than £30,000 (3 pots of £10,000 regarding small pots, plus unlimited small occupational pots).

While we keep information on the website as up to date and as accurate as possible, the information on this website does not form part of our advice process. Cambridge Pensions Ltd cannot accept any liability for any decisions made by a client or member of the general public based on any information contained on this website. The value of your investments can go down as well as up and you may get back less than has been paid in.