Benefit options summary

Here you'll find a summary of all the benefit options including tax-free cash entitlement, minimum and maximum benefit ages, tax and details on what triggers the money purchase annual allowance.

Benefits covered:

Early retirements 

 Ill health Severe ill healthSerious ill health 
Summary

An individual’s uncrystallised rights may be paid if the individual is in ill-health at any age.

An individual's uncrystallised rights may be paid at any age if they are unlikely to be able to do any type of gainful work, other than in an insignificant way, before state pension age. 

The annual allowance does NOT apply to contributions in the year benefits are taken from arrangements meeting the above conditions. This is the case for the pension input period ending in the tax year the individual becomes entitled to benefits.

An individual’s uncrystallised rights may be paid as a lump sum on the grounds of serious ill-health at any age. 

The annual allowance does NOT apply to contributions in the year benefits are taken from arrangements meeting the above conditions. This is the case for the pension input period ending in the tax year the individual becomes entitled to benefits.

Conditions
  • The scheme administrator accepts qualified medical advice that the individual satisfies the ill-health condition and so is, and will continue to be, medically incapable (either physically or mentally) of continuing his or her 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. 

Scheme rules may have stricter ill-health criteria. For example, they may state that the individual must be incapable of carrying out any occupation, rather than the current occupation they are in.

  • The scheme administrator accepts evidence from a registered medical practitioner that 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 individual becomes entitled to all their benefits under that arrangement because they are unlikely to be able to work at any time up to state pension age.

This means the individual is not able to continue in their current job and is not likely to be able to take any other paid work to the extent that this is significant. For example, the individual could undertake voluntary work or unpaid work where out of pocket expenses are reimbursed or small amounts of travelling or subsistence payments are made. Any paid work should be insignificant, for example it should be infrequent or only for a few days during the year and the payment must be small in amount, not just as a proportion of previous pay or salary. 

  • The scheme administrator has received written evidence from a registered medical practitioner confirming the individual is expected to live for less than one year.

  • The individual has not used up all of their lifetime allowance at the point the payment is made. The position where the payment, once made, actually breaches the 100% of the individual’s available lifetime allowance is explained below.

  • The payment must extinguish all uncrystallised rights under the arrangement. If no benefits have yet been taken under the arrangement (none have crystallised so far), this means all of the rights in the arrangement must be commuted and paid as a serious ill-health lump sum. If only some benefits have previously crystallised, then the full remainder of uncrystallised rights under the arrangement must be commuted for the serious ill-health lump sum.

Lifetime allowance 

  • Before age 75 - Whilst the individual must have available lifetime allowance the level of lump sum paid is not limited by the level of available lifetime allowance. If the lump sum exceeds the available lifetime allowance a charge of 55% will be due on the excess. 

  • After age 75 - For the purpose of determining whether the individual has available lifetime allowance, the benefit crystallisation event at age 75 in respect of the uncrystallised pension from which the serious ill health lump sum is to be paid is ignored. Any benefits already taken post age 75 that would have been tested against the lifetime allowance had they been taken before that age are treated as if they had been tested against the lifetime allowance.

Maximum tax-free amount

Usually 25% but more can be paid if they have protected TFC.

 

  • Before age 75 – all tax-free.

  • After age 75 - all taxed as pension income at marginal rate. 

Income limits

N/A 

What happens at age 75?

N/A

Benefits taxed at marginal rate.

Minimum age

None

State pension age

None

Maximum age

None

Tax

Balance after TFC taxed at marginal rate.

  • Under 75 – tax-free

  • Over age 75 - taxed as pension income at marginal rate. 

MPAA triggered?

No

Small lump sum

 Occupational pension schemesNon-occupational pension schemeTriviality (defined benefit scheme)
Summary

A lump sum that extinguishes an individual's rights under an occupational scheme or public service scheme.

A lump sum that extinguishes an individual's rights under a non-occupational scheme, for example PP or stakeholder.

A lump sum that extinguishes an individual's rights under a defined benefits scheme.

Conditions
  • The individual isn't a controlling director or connected to a controlling director.

  • The payment doesn't exceed £10,000.

  • The value of the individual's rights under this and any related scheme doesn't exceed £10,0001.

  • The payment extinguishes the individual's entitlement to benefits under the scheme however an annuity already in payment by the scheme may continue in payment provided the individual has not already received a small lump sum.

  • No recognised transfer had been made out of this or any related scheme in the previous three years.

1 If the scheme is a larger pension scheme, there is no need to include rights under a related scheme. A larger pension scheme is one that has at least 50 members and meets various other conditions.

  • The payment doesn't exceed £10,000.

  • The payment extinguishes the individual's entitlement to benefits under the arrangement (not scheme) however an annuity already in payment by the scheme may continue in payment provided the individual has not already received a small lump sum.

  • The individual has not previously received more than two payments under these regulations, that means only three payments can be made.

If the combined value of all of their registered pension scheme benefits is not more than £30,000, they can take all of their defined benefits as a lump sum. The value must include the value of any pensions in payment. Before the benefits can be taken on the grounds of triviality all of the following must apply:

  • No previous trivial lump sum can have been paid more than 12 months ago, but trivial payments made before 6 April 2006 can be ignored.

  • All of the benefits under the defined benefits scheme and any in-payment money purchase in-house scheme pension have to be taken at the same time.
  • The individual must have some lifetime allowance available.

  • The total value of all the individual's benefits (not just the defined benefits) can't be more than £30,000.

  • After the payment the individual has no rights left in the scheme.

Maximum tax-free amount

 25% of uncrystallised funds
(cannot take more than this even if they have protected TFC).

Income limits

N/A

What happens at age 75?

N/A

Minimum age

55 or earlier if they have a protected pension age.

Maximum age

None

Tax

The individual can receive up to 25% of the lump sum tax-free. The rest is eventually payable at the individual's marginal rate of income tax. But depending on the individual circumstances the tax that will be deducted from the payment is as follows:

  • Where the lump sum payment is in respect of a pension already in payment the PAYE code already in operation will be used.

  • Where the pension being commuted was not already in payment the basic rate (BR) tax code will be used.

  • Where the recipient is not UK tax resident the emergency tax code will be used.

If the individual thinks they have paid too much or not enough tax, then they will need to discuss this with HMRC.

If a pension in payment is commuted and taken as a trivial lump sum none of the trivial lump sum will be tax-free.

MPAA triggered?

 No  

Lump sums

 Uncrystallised funds pension lump sum (UFPLS)Phased uncrystallised funds pension lump sum
Summary

From 6 April 2015 the option to take benefits under triviality from a defined contribution plan was removed and replaced with UFPLS.

Although this is not income drawdown it can achieve a similar result as phased income drawdown.  The individual crystallises the amount required each year, which will be a mixture of TFC and taxed income.  Not all plans allow partial UFPLS.

Conditions

To use this option the individual can't have primary or enhanced protection with protected tax-free cash over 25% and must have available lifetime allowance (LTA):

  • Those under age 75 will need the whole of the UFPLS to be within their LTA. Where the amount crystallising exceeds the available lifetime allowance the excess can still be paid as an authorised lump sum payment as a lifetime allowance excess lump sum.

  • Those over age 75 only require part of the UFPLS to be within their remaining LTA however any amount in excess of the LTA will be taxed at 55%.

It is only available from uncrystallised funds.

Maximum tax-free amount

 25% of uncrystallised funds
(cannot take more than this even if they have protected TFC).

Income limits

N/A

What happens at age 75?

N/A

Minimum age

55 or earlier if they have a protected pension age.

Maximum age

None

Tax
  • Below age 75 - 25% of the value of the UFPLS will be tax free. 75% of the value of the UFPLS will be added to the individual's taxable income in that year and taxed accordingly.
  • Over age 75 - 25% of the lower of the value of the UFPLS and the available lifetime allowance is tax free.  The balance will be added to their taxable income in that year and taxed accordingly.
MPAA triggered?

Yes 

Secure pension 

 Lifetime annuity Scheme pension 
Summary

This can be bought from an insurance company and is not restricted to the company providing the pension plan (OMO).

This can be paid directly from the scheme assets or secured through an insurance company.

Conditions

Individuals can select either an annuity guarantee period or annuity protection. There is no maximum guarantee period, but conditions may apply.

Annuity protection allows a lump sum to be paid out on death. This is based on the difference between the annuity purchase price less income payments already paid.

It is also possible to provide a survivor's annuity that will be paid on the death of the individual.

Maximum tax-free amount

  Usually 25% but more can be paid if they have protected TFC.

Income limits

N/A

What happens at age 75?

N/A

Minimum age

55 or earlier if they have a protected pension age.

Maximum age

None 

Tax

Annuity - After the TFC has been paid the balance is payable at the individual's marginal rate of income tax. 

Annuity guarantee - Where the individual dies after becoming entitled to a lifetime annuity, and payments continue under the contract because of a guarantee, the recipient of the continued payments will pay tax at their marginal rate of income tax. 

Annuity protection - This lump sum is called an annuity protection lump sum death benefit. If the individual dies before age 75 the lump sum is paid tax-free, if they die after age 75it is taxable at the recipient’s marginal rate of income tax.

MPAA triggered?

 No 

Income drawdown

 Short-term annuityFlexi-access drawdown Capped drawdownPhased drawdown
Summary

Short-term annuities allow an individual to buy an annuity from an insurance company (on the open market, if required), or a series of annuities with all or part of their benefits.

All new drawdown plans set up from 6 April 2015 are flexi-access drawdown plans. On 6 April 2015 all existing flexible drawdown plans automatically converted to flexi-access drawdown plans.

Flexi-access drawdown involves taking a pension directly from a fund instead of buying an annuity. 

If an individual in capped drawdown takes more than the maximum income their plan is converted to a flexi-access drawdown plan.

Capped income drawdown involves taking a pension directly from a fund instead of buying an annuity. They could only be set up before 6 April 2015. There is, however, a limit on the maximum amount of income that can be withdrawn during a year and this limit is reviewed on a frequent basis.

This is when a combination of TFC and income is used each year to provide the required income. Only the amount needed to provide the income is moved into income drawdown, the balance remains uncrystallised. Assuming the individual doesn't require the maximum permitted TFC at the start, this combination provides maximum flexibility.

Conditions

Where an individual becomes entitled to a fixed-term annuity, it qualifies as a short-term annuity for the purposes of the tax rules if it is:

  • Bought by the application of sums or assets representing all or part of the individual’s drawdown pension fund.

  • Payable by an insurance company, and

  • Payable for a term not exceeding 5 years.

An individual wishing to take their pension benefits as drawdown pension must designate uncrystallised sums and assets in a money purchase arrangement as being available for drawdown pension.

Where the individual is making a designation on or after 6 April 2015 and they did not have an existing drawdown pension fund, they must designate the sums and assets as available for the payment of drawdown pension in a flexi-access drawdown fund. 

When the individual designates the new funds as available for flexi-access drawdown, they may choose to receive TFC of an amount equal to one third of the value of the funds put into the flexi-access drawdown fund. So if the individual has a pension pot of £40,000, they could designate £30,000 as available for drawdown and the remaining £10,000 (which is one third of £30,000) can be taken as TFC.

Maximum tax-free amount

None as TFC paid when benefits are crystallised.

Usually 25% but more can be paid if they have protected TFC and all of the fund is crystallised at the same time.

TFC of up to 25% of the crystallised fund is payable each time crystallisation takes place. More than 25% could be paid if there is protected TFC and all of the fund is crystallised at the same time.

25% of the value being designated. Any TFC protection will be lost.

Income limits

If bought by a flexi-access drawdown fund, there is no upper limit on the amount a short-term annuity can pay.

However, where a short-term annuity is bought using funds from a capped drawdown pension fund there is an upper limit on the amount of short-term annuity that can be paid. The amount payable from a short-term annuity contract plus the amount of any income withdrawal from the capped drawdown pension fund in a pension year cannot be more than the maximum drawdown pension.

If the individual is taking capped drawdown their maximum drawdown pension will be reviewed

  • at least every three years if they are under 75, and

  • every year when they are 75 or older.

So, in considering the length and amount of a short-term annuity contract the individual may buy, they need to remember that their maximum drawdown pension could change part way through the term of the annuity. If their maximum drawdown pension goes below the amount payable by their short-term annuity contract the excess amount will be an unauthorised payment.

The remaining fund after TFC has been paid will be designated to provide drawdown, which may be taken as a regular income, as a single lump sum or on an ad hoc basis as required. The amount that can be withdrawn is not subject to income limits; however any amounts withdrawn will be added to the individual’s taxable income in that year. There is no minimum income requirement. Individuals in flexi-access drawdown may continue to make contributions; however, if they take any income, they will be subject to the money purchase annual allowance of £4,000.

The maximum amount of income that can be taken during a 'pension year' is 150% of the Government Actuary's Department (GAD) relevant annuity with no guarantee.

The remaining fund after TFC has been paid will be designated to provide either capped drawdown or flexi-access drawdown, which may be taken as a regular income, as a single lump sum or on an ad hoc basis as required.

If capped drawdown then the maximum amount of income that can be taken during a 'pension year' is 150% of the Government Actuary's Department (GAD) relevant annuity with no guarantee.

If flexi-access drawdown the amount that can be withdrawn is not subject to income limits; however any amounts withdrawn will be added to the individual’s taxable income in that year.

Individuals in flexi-access drawdown may continue to make contributions; however, if they take any income they will be subject to the money purchase annual allowance of £4,000.  The MPAA isn’t triggered by withdrawals from a capped drawdown plan within the cap.

What happens at age 75?

The annuity does not have to come to an end when the individual reaches age 75.

Reaching age 75 is a benefit crystallisation event (BCE) and so the drawdown fund will be tested against the lifetime allowance. Obviously, going into drawdown in the first place was also a BCE so, to avoid 'double counting' against the lifetime allowance, the amount originally crystallised when the individual went into drawdown is deducted. Only the balance (if any) counts as an additional BCE amount.

Reaching age 75 is a benefit crystallisation event (BCE) and so the drawdown fund will be tested against the lifetime allowance. Going into drawdown in the first place was also a BCE so, to avoid 'double counting' against the lifetime allowance, the amount originally crystallised when the individual went into drawdown is deducted. Only the balance (if any) counts as an additional BCE amount.

For capped drawdown the review dates also change - the maximum drawdown pension will now need to be recalculated at the start of every pension year. The switch over to yearly reviews will happen at the end of the pension year following the individual's 75 birthday.

 
Minimum age

55 or earlier if they have a protected pension age.

Maximum age

None

Tax

Tax is payable at the individual's marginal rate of income tax.

MPAA triggered?

Yes, if bought by a flexi-access drawdown plan but not if bought by a capped drawdown plan.

Yes, but only when income commences.

No

Yes, but only when income starts from a flexi-access drawdown plan.

Useful links

Note

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.



Share by email:

Share by email:

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.