Flexible pension drawdown is just around the corner, but some retirement savers may want to take some cash from their pension while still retaining the option of contributing more than £10,000.
Capped drawdown is the answer – providing a pension saver acts quickly as the rules change on April 6, 2015, when flexible drawdown comes into force.
Current rules let pension savers take money from their pensions as tax-free cash or income.
The catch is anyone taking cash from their pension must carefully make sure they stay under the threshold.
Capped drawdown lets a retirement saver take up to 150% of the value of an equivalent annuity the drawdown cash could buy in the financial year.
Although the top end is capped, no minimum figure applies.
Watch the finer detail
The bonus is any pension saver moving some or their entire fund into a capped drawdown arrangement before April 5, 2015, keeps their annual maximum contribution allowance of £40,000.
Retirement savers should take care before taking the cash –
- The pension provider should run a scheme where any transfers in from another scheme are added to the existing pension. Most providers set up a new plan for each transfer, but the rules say that a capped drawdown pension cannot start after April 5, 2015
Moving money under these circumstances would mean the capped drawdown would not work.
- Any saver wanting to enter into capped drawdown who does not take some cash before April 5, 2015 will have their annual contribution allowance limited to £10,000 to stop churning – the practice of taking cash out of a pension and then putting it straight back to gain pension contribution relief
- From April 5, capped drawdown is not an option for retirement savers – it disappears when flexible access starts, but existing arrangements can continue
Time is running out to take advantage of capped drawdown.
Clock is ticking
For retirement savers in workplace pension schemes, capped drawdown is often unavailable and means switching money out of the employer scheme in to a private pension.
This can come with fewer benefits and increased charges, so is often considered unwise for someone with a fund of less than £50,000.
The first step is asking a current pension provider for a transfer value.
Next speak to a professional adviser about the best destination scheme for the cash under capped drawdown rules.
The mechanics of the transfer are quite straightforward, the problem is time is of the essence as many pension providers may take longer than the month left to finalise the fund transfer.