There are many reasons why those over the age of 55 may need to access their pension benefits early, whether that is for repayment of debt, financial assistance for a business or helping family members.
For someone requiring access to cash, using Pension Funds would certainly not be the first option, as a Pension is designed to provide cash and income for your retirement, however where you are unable to access cash elsewhere and your Pension Funds are the only option to raise the cash needed, then recycling income from your Funds can help to make this route as tax efficient as possible.
The tax treatment of Pensions is different between those Funds which have been used to access Tax Free Cash (TFC) known as Crystallised Funds and those that have the TFC intact and are known as Un-crystallised Funds. It is important to understand the distinction between the two – Un-crystallised Funds allow for the full fund value to be paid to your estate free from any tax on death prior to age 75, and your funds continue to grow in the most tax efficient manner thus building more TFC. Crystallised Funds, on the other hand, do not allow for any further TFC as your fund grows and on death, the value of the fund paid to your estate will be after a recovery charge by the HMRC of 55%.
For those that have Crystallised Funds or if you are planning to Crystallise your Pension Funds, it may be appropriate to consider taking the maximum income from your Funds.
Any income taken from your Crystallised Funds is taxed at your highest marginal rate, however when you reinvest the same income into a new Pension Plan you will receive tax relief at your highest marginal rate, making the exercise tax neutral. This process creates a new fund of Un-crystallised pension thus generating a further tax free lump sum and in the event of death, the benefits can be paid free from tax.
As you would expect, there are advantages and disadvantages with any type of Pension Planning, and no action should be taken without first seeking financial advice.
If you would like to learn more about your pension options and maximising the tax savings opportunities of Pension Planning, please contact one of our consultants.