Retirement - frequently asked questions
Your questions answered.
Does an individual in an occupational pension scheme have to actually retire and stop working before they can start to take their benefits?
No, provided their scheme rules allow it.
How much tax-free lump sum can be taken from a retirement annuity contract?
The maximum amount of tax-free lump sum an individual can take from a retirement annuity contract is 25% of the value of the plan. It's not possible for individuals to protect any entitlement to more than 25% tax-free lump sum they had before 6 April 2006 (A-Day).
How much tax-free lump sum can an individual take when they crystallise their benefits if they were entitled to more than 25% tax-free lump sum on 5 April 2006?
Individuals who didn't opt for transitional protection, and had the right to more than 25% of their benefits value at 5 April 2006 as a tax-free cash lump, can have the higher percentage paid when they crystallise their benefits. They didn't have to register this unless they were also applying for primary or enhanced protection. The higher tax-free lump sum amount is based on the amount of tax-free lump sum at 6 April 2006 (A-Day) increased by 20% until such time as the lifetime allowance is greater than £1.8m when it will be indexed in line with the increases to the lifetime allowance.
Individuals must become entitled to all of their pension and lump sum rights (that were not in payment on 5 April 2006) under the scheme on the same day.
Is it possible to take benefits on the grounds of ill-health?
Under all of the following types of ill-health the Trustees of the scheme will need to obtain medical evidence that proves the individual is incapable of carrying out their job because of physical or mental impairment.
Ill-healthIt's possible for individuals to take their benefits before age 55 in the case of ill-health.
The scheme administrator has medical evidence that the individual is, and will continue to be, medically incapable (either physically or mentally) of continuing their current occupation as a result of injury, sickness, disease or disability, and as a result of the ill-health the individual ceases to carry on that occupation.
The normal tax-free cash rules apply to the benefits paid.
The annual allowance applies in the year benefits are taken.
Severe ill-healthIt's possible for individuals to take their benefits before age 55 in the case of severe ill-health.
The individual is unlikely to be able to do any type of gainful work, other than in an insignificant way, before state pension age.
The normal tax-free lump sum rules apply to the benefits paid.
The annual allowance does NOT apply in the year they are taken.
It's possible for individuals to take their benefits as a lump sum before age 55 on the grounds of serious ill-health.
Before this can be done, the trustees will need to obtain medical evidence that the individual's life expectancy is less than one year. The amount of the benefit is tested against the lifetime allowance and the excess benefits are liable to the lifetime allowance charge of 55% as it's a lump sum.
All uncrystallised benefits must be taken from that arrangement.
If they're under age 75, the individual will receive the benefits tax-free. If they're 75 or over the benefits they'll be taxed at their marginal rate of tax.
The annual allowance does NOT apply in the year they are taken.
In all of the above cases restrictions apply to Guaranteed Minimum Pension benefits.
Is it possible to take contracted out benefits on the grounds of ill-health?
The normal rules for taking benefits on any of the ill-health basis still apply but there are different rules apply depending on the type of contracted out benefits.
Section 9(2B) rights, also known as Reference Test Scheme benefits, can be taken early on the grounds ill-health. A tax-free cash lump sum can be paid as normal.
Guaranteed Minimum Pension benefits can only be taken on the grounds ill-health if the revalued GMP at age 65 for men and at age 60 for women is met. No tax-free lump sum can be paid from the GMP benefits.
For both, an amount must be retained to provide for a survivor's pension on death if the individual is married or has a civil partner.
Can sports people retire earlier than age 55 or age 57 from 6 April 2028?
A: Before 6 April 2006, pension plans for professional sports people could have a lower-than-normal minimum pension age. HMRC maintained a list of these occupations; for example professional football players could retire from age 35 and this entitlement could continue after that date.
Pension plans taken out after 6 April 2006 normally can't include a minimum pension age of earlier than age 55 even for sports people. However, if a plan with a low pension age is block transferred into a new plan, the low pension age is protected and applies to the new plan.
Where the individual crystallises their benefits before 50, their level of lifetime allowance is reduced by what is called the relevant percentage.
The individual’s lifetime allowance is reduced by 2.5% for each complete year between the date on which the benefit crystallisation event occurs and the date on which the individual will reach age 55 (or 57 from 6 April 2028). So, for an individual pre-2028 with a protected pension age of 35, who takes benefits on their 35th birthday, has 19 complete years between their 35th birthday and age 55. This means their lifetime allowance is reduced by 47.5% (19 x 2.5%). The reduced lifetime allowance alters the individual’s available lifetime allowance both for the purposes of calculating whether any lifetime allowance charge is due and in terms of the maximum pension commencement lump sum payable.
An individual is receiving Pension Credit from DWP. If they take tax-free lump sum from their drawdown plan but zero drawdown income, will their Pension Credit remain unaffected?
DWP will assume they’re receiving a ‘notional’ income from their drawdown plan and calculate the Pension Credit (and any other means-tested benefits they receive) accordingly, regardless of the amount of drawdown income they're actually taking. ‘Notional’ income is an amount equivalent to the income that the individual would receive if they had bought an annuity. DWP will also take capital of more than £10,000 into account, so their tax-free cash could also have an effect.
When an individual takes all their pension benefits as cash, how will it be taxed?
If it's uncrystallised, tax-free cash will still be available (25% of the plan value), the rest is taxed as income at the individual's marginal rate of income tax. Of course this could in itself push them into the higher rate or even additional rate tax bracket.
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.