Building new Untouched pension savings

Posted on Wednesday, October 9th, 2013

An opportunity to potentially improve tax-efficiency

Rawdown is the main alternative to a secure annuity income. It is more flexible than an annuity but is also more complex and higher risk. Figures from Skandia (08 July 2013) show only one third (35 per cent) of people in drawdown are actually taking their full income allowance.

This means two thirds (65 per cent) of people with money purchase pension savings have the opportunity to potentially improve their tax-efficiency, and hence their overall long-term wealth. This can be achieved by opting to use some or all of their available pension income to build new untouched pension savings.

Qualify for tax relief

Individuals under 75 can currently achieve tax relief on contributions into a pension of up to £3,600 each year, even if they are not working. If someone is working they will qualify for tax relief on further contributions, subject to the annual contribution allowance and the level of their earnings.

New pension savings

Using the pension income to invest into new pension savings can have many benefits and no real downside. The income tax paid when money is taken from the existing pension is offset by the tax relief received when it is invested as new pension savings.

Future retirement income

Utilising unused drawdown income in this way, the new pension fund is not deemed to be ‘in drawdown’ and is not subject to the 55 per cent tax liability on lump sums paid to beneficiaries on death before age 75. The newly created pension fund will provide a further 25 per cent tax-free lump sum as part of their future retirement income (provided the savings are within the Lifetime Allowance).

Tax-free sum

For those in drawdown who have taken their tax-free lump sum but are not using all of their available income to improve the tax-efficiency of those savings with no real cost to themselves, not only does this planning reduce the potential tax liability for their beneficiaries on any available lump sum if they die before 75, it will also build another 25 per cent tax-free lump sum, helping to provide greater income in the longer term. This is good news for appropriate pensioners who may not be taking the maximum income allowance each year to build a more effective retirement income strategy.

Drawdown is a complex product. If you are at all uncertain about its suitability for your circumstances, you should seek professional financial advice. Your income is not secure. You control and must review where your pension is invested, and how much income you draw. Poor investment performance and excessive income withdrawals could deplete the fund.

The articles featured in this digital magazine are for your general information and use only and are not intended to address your particular requirements. They should not be relied upon in their entirety. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation.

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