Insightful report on the new pension freedoms by Rod Thomas FCA, Managing Director at http://www.avantiswealth.com

1. PENSION FREEDOMS 2015
THE ESSENTIAL GUIDE
WWW.AVANTISWEALTH.COM
THE RICHER RETIREMENT SPECIALISTS
RODTHOMAS INVESTMENT

2. From 6th April 2015 and beyond, the pension
landscape changes enormously. New laws
introduced by our Government have set in motion the
biggest changes to pension legislation for perhaps
70 years.
In essence, the Government has decided to treat
us like grown-ups, able to make our own decisions
about our own future – with a set of flexible rules
that give us great freedom in terms of how we plan
our provision for retirement.
But with this freedom comes responsibility.
Responsibility to ensure you make good decisions
about your own future. The starting point for good
decisions is understanding the changes and how
they apply to your circumstances.
In this guide to the new pension freedoms we
explain the major changes. Our intention is
to provide information in plain English that is
understandable. Nothing here should be considered
advice, which can only be given by a qualified
financial advisor. However we hope that you find
the information valuable and useful as a first step
to exploring your options and making the right
decisions.
PensionFreedoms–
Yournextsteps
What do you want to know more about?
Here are the topics in more detail about the
new pension freedoms.
Flexible access to your pension
Taking tax free cash from your pension
Death benefits – leaving a legacy behind
Pension contributions - revised rules
Taking income through drawdown
Annuities – the impact of changes
Pension Wise – the new Government
guidance service
Next Steps
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3. 3
Flexible access to your pension
When you take benefits from your pension after 5th
April 2015 the new rules mean you will have much
more freedom over how you choose to take money
from your fund.
You may take:
All your pension fund in one lump sum
Partial sums as and when you choose, or
A regular income
Pension withdrawals to suit your needs
The big change is that you can now make withdrawals
of capital and income without limit. You can even
withdraw 100% of your fund in one transaction.
However, a word of caution because this could result in
a substantial tax bill.
The other major issue is that if you will need to use
income from your pension in the future to live on, it
is important to restrict withdrawals – leaving enough
in your pension to support your income needs in the
future.
If you will use your pension fund for income, then
withdrawals are now very flexible, although your
pension company may impose their own restrictions.
From a the perspective of the ‘rules’, you can take ad-
hoc payments when you need them, or set up a more
regular payment system such as a monthly, quarterly,
bi-annual payment system.
You may have chosen to invest in certain assets like
commercial property inside a SIPP, SSAS or other
scheme that allows such investments. In this case
you will need to match your planned income with the
availability of income from the investments you have
selected. Options may not be straightforward and if
you are unsure please consult a regulated financial
advisor.
Tax treatment of pension withdrawals
You can normally take 25% of your fund as a tax-free
lump sum. This hasn’t changed.
Now, any withdrawals after the tax- free cash - whether
withdrawn as a lump sum or as regular income - will be
taxable. You will be liable to tax at your marginal (i.e.
highest) rate.
You may take all of your tax-free cash in one go, or
withdraw your tax-free cash over a period of time.
We’ve explained the tax rules in more detail on the
‘Taking tax free cash from your pension’ page.
A big danger to be aware of is that if you withdraw too
much income or capital at once, you could be pushed
into a higher tax bracket. For example, you could be
taxed at 40% instead of 20% on some of the money
taken from your pension fund. Don’t let this happen to
you by mistake – take professional financial advice to
ensure you aren’t caught in this ‘tax trap’!
What are the restrictions within the new pension
rules?
Some restrictions remain the same as before the
changes. Other restrictions have been introduced or
updated. Here’s a quick summary:
• You must be 55 before you can take any benefits
from your pension fund.
• If you have pension funds in excess of the
“lifetime allowance”, currently £1.25 million, you
can still take flexible withdrawals but you will
pay significant tax charges on any funds over the
lifetime allowance. The lifetime allowance is due to
fall to £1 million with effect from April 2016.
• If you already have a pension in capped drawdown
(you’ll know it if you have it!) then you can use the
new rules to access more income but you will not
be able to take any further tax free lump sums.
• If you have certain types of lifetime allowance
protection, or an enhancement to your lifetime
allowance, some of the new options may not be
available to you.
One really important new innovation is that if you are
approaching retirement, you are entitled to a free and
impartial ‘guidance’ session with the Government’s
new service – Pension Wise.
You will notice that the critical word used is ‘guidance’
and not ‘advice’. This session with help you understand
your options and act as a signposting service for
further information. It will not, however, provide
specific personal advice on suitable products or
services. Learn more about the service and how to
access it on our Pension Wise information page.

4. Taking tax free cash from your pension
Currently most people can take 25% of their pension
tax free as an up-front lump sum.
From April 2015 you can choose to either take the tax
free cash all in one go or have a portion of any income
paid tax free.
Example:
Suppose you have a SIPP (self-invested personal
pension) with a fund valued at £200,000 that you have
not taken any benefits from, you may choose to:
Take a lump sum of £50,000 tax free and use the rest
of your fund to provide a taxable income. You do not
have to take the income immediately, and you can vary
your income payments as you like. This is called ‘flexi-
access drawdown’.
Withdraw your whole fund. 25% will be tax-free and
the rest taxed as income, payable at your marginal rate
of tax.
Withdraw part of your fund. For example; access half
of your fund and take £25,000 as a tax free lump sum.
Nominate £75,000 to take income. The other half
(another £100,000) of your fund can be used in the
future to provide you with further lump sums or to
take income. In the meantime this part of the fund will
continue to grow tax free within your pension.
Withdraw part of your fund as a lump sum with 25%
tax-free and the rest taxed as income. The funds left
in your pension can then be used to provide benefits
in the future as another lump sum or series of lump
sums to provide you with an income. The first 25% of
any future payments would also be tax-free, with the
balance taxed as income when you withdrew it. This is
called an ‘uncrystallised funds pension lump sum.’
Without getting too complicated, it is also OK to mix up
how you choose to use your fund.
For example, you may choose to take the first 50%
(£100,000) as a lump sum, of which 25% is tax free and
the balance taxable. In the future you could then take
a further 25% of the remaining £100,000, also tax-free,
leaving the rest of the fund in your pension to provide
an income.
Taking income from your fund is called drawdown.
Choosing this as an option instead of purchasing an
annuity is an important decision. Much of the driving
force behind these pension reforms has been the
Government view that for many years annuities have
offered poor value to pension savers and therefore this
legislation has removed any requirement to purchase
one.
However, you do need to consider the investment
returns that you may be able to achieve through
drawdown and the level of income that you wish to
take. If you are unsure about your options you should
consult a regulated financial adviser.
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5. 5
Death benefits – leaving a legacy behind
Up until now, a penal taxation regime impacted the
value of any pension on death. In fact many pension
savers worked hard to ensure that they had nothing
left because of the 55% so called ‘death tax’.
The new legislation has turned this on its head and
now it can be positively advantageous to leave a legacy
to your loved ones through your pension fund rather
than through direct ownership of assets. In fact, the
changes go further than you might expect because
now you can leave a legacy for your children, their
children and for generations beyond that!
The big issue of inheritance tax is a key element of the
decision process about planning the disposition of your
estate prior to death. That decision process should now
include an assessment of the benefits of your pension
fund.
The dramatic changes now in force apply to who you
can nominate to receive your benefits and how those
benefits are taxed.
Who can receive the death benefits from your
pension fund?
You can nominate whoever you like to receive your
death benefits. This could be your partner, children
or grandchildren. You can even nominate someone
completely unrelated. You may also leave part or all of
your fund to charity.
Benefits can be spread how you wish – in whatever
arrangement and proportion you choose. Each of your
beneficiaries can receive a share of your pension fund.
It is a good idea in the ‘new world’ of pensions that you
complete a death benefit nomination form and ensure
that it filed both with your personal papers and your
pension scheme administrators.
How are death benefits paid?
Beneficiaries of your pension will normally have the
choice of taking the fund as a lump sum or leaving the
fund invested and using it to provide an income.
If they choose to leave the fund invested they can take
income when they wish. Any funds remaining invested
will continue to benefit from being in the tax-free
pension scheme.
Changes to how death benefits are taxed
The tax treatment of death benefits paid from your
pension now depends on two factors:
1. Your age when you die.
2. Whether or not the funds are ‘designated’ to
your beneficiary within two years - designating
the funds just means transferring them into the
beneficiaries’ names.
The tax rate no longer varies depending on whether or
not you are taking your pension at the time of your death.
Death before age 75:
If you die before your 75th birthday and your pension
funds are ‘designated’ to your beneficiaries within two
years they will be paid tax free.
If your beneficiaries choose to take income from the
fund they do not need to take the money out within the
two-year period but can wait and take income when
required. The tax treatment is the same regardless of
whether the beneficiaries opt to take a lump sum or
income.
Death after age 75
If you live beyond your 75th birthday, or if you die
earlier but your pension funds are not designated
within two years, then the death benefits are taxable.
If your beneficiaries use the funds to take income,
they will pay tax on the income they receive at their
marginal rate. If they choose to take a lump sum it will
currently be taxed at 45%.
All beneficiaries should consider the tax consequences
carefully before withdrawing a lump sum. From 6th
April 2016 the 45% rate will be changed to tax at the
beneficiaries marginal rate of income tax, so it may be
advantageous to wait until after April 2016 before any
lump sum withdrawal.
What happens to the fund when the beneficiary dies?
For the first time it will is possible to pass on your
pension fund through many generations. This radical
change means that your pension fund can be used as
a legacy to provide financial support for generations to
come!
How does this work? If your beneficiary has not
withdrawn the entire fund before their death then the
funds can be passed on again. Your beneficiary may
nominate successors who they want the funds to go to
following their death.
The successors will then have the option of taking the
funds as a lump sum or using it to provide an income,
just like the first time around.
The tax treatment of the death benefits will depend on
the age of the beneficiary who was holding the pension
at their death, not on how old you were at your death.
As an example, if you live to be 90 and leave the fund
to your child age 60 then the death benefits payable
to your child would be taxed (as you lived to be over
75). If your child took the benefits as income and the
fund had not all been used before their death at age
70 then the remaining fund could be passed on to their
successors tax-free as they died before age 75.
It is possible to have unlimited successors, so your
pension fund could be passed on for generations if it is
not all taken out.

6. 6
Pension contributions - revised rules
The new pension’s freedom rules allow much greater
flexibility in terms of how you can take your benefits.
However, restrictions are being put in place on the
amount you can contribute to your pension once you
have flexibly accessed your pension benefits. This is
to ensure that people do not abuse the new rules by
taking higher levels of income from their pension to
fund further contributions back into their pension and
gain large amounts of tax relief.
Annual allowance
The annual allowance is the maximum amount you can
contribute to all your pensions each tax year. This is
currently set at £40,000.
If you go over the annual allowance you can make
use of your annual allowance from the previous three
tax years. This is provided you were a member of a
pension scheme and have some of your allowance in
those tax years left over.
What is changing?
Once you have accessed your pension benefits using
flexi-access drawdown, you can only contribute up
to £10,000 to your defined contribution pensions
each year. Also you won’t be able to increase your
contributions through the unused contribution
allowance from previous tax years.
The overall annual allowance still applies. So if you
also have a final salary scheme (also known as a
defined benefit scheme) you can continue to accrue
benefits worth up to £40,000 a year in total, plus any
unused allowance from the previous tax years. But as
discussed above, the amount you contribute to all your
money purchase pensions must not exceed £10,000.
This seems particularly unfair to the huge number
of people saving in a defined contribution scheme.
Maybe the Government will change the rules in future
budgets!
This reduction to £10,000 maximum annual
contributions is called a ‘restricted allowance’ and can
be triggered by different events:
When is the restricted allowance triggered?
You will be affected by this new allowance when you:
• take any benefits flexibly from your pension
• exceed your income limit in capped drawdown
• take an income payment after you have told your
scheme administrator you want to move from
capped drawdown to flexi-access drawdown
• purchase a flexible annuity that allows income to
decrease
• have previously been taking flexible drawdown
(before 6 April)
You will not be affected by this new allowance if you:
• take a tax-free lump sum but no other income
• continue to take income below your annual limit in
capped drawdown
• purchase a traditional lifetime annuity
• take a lump sum or income as a beneficiary of
someone else’s pension

7. 7
Taking income through drawdown
If you started taking income from your pension on or
before 5 April 2015 you will be taking either ‘capped’ or
‘flexible’ drawdown.
Capped drawdown
Under ‘capped drawdown’ there is a maximum level of
income you can withdraw from your pension each year.
This amount is reviewed every three years until you
are 75 and then annually.
Now your options have changed. You can…
• continue to take capped drawdown
• move to the new ‘flexi-access’ drawdown. This
allows you to take any level of income you want
from your pension
Under flexi-access drawdown you choose how much
income to take. However there can be substantial tax
bills unless you plan carefully. Also if you withdraw
too much you might find your fund shrinking until it
disappears whilst you still have years of life ahead of
you!
If you rely on your pension income for support, make
sure that the level of income you take will ensure your
fund lasts for your lifetime. This can be difficult to
calculate.
As we’ve already discussed. if you switch from capped
drawdown to flexi-access drawdown the maximum
annual contributions to your pension reduces to
£10,000.
Flexible drawdown
Anyone taking ‘flexible drawdown’ on 6th April 2015,
will be automatically moved to ‘flexi-access’ drawdown.
This makes no difference to the access to your benefits
since you could already draw what you want, when you
want. However the new £10,000 annual contribution
limit will now apply.
For details. Our case study shows how this change will
take effect.
Tax treatment
Income from your pension is taxed at your marginal
rate of income tax. If you increase your level of income
this may put you into the next tax bracket, meaning
you pay a higher rate of tax.
Example:
Suppose you still have £40,000 a year of earned
income when the personal allowance is £10,000. You
would be paying tax at 20% on a net £30,000.
However, if you decided to take £20,000 of income
from your pension, your total income for tax purposes
is £60,000, less the £10,000 personal allowance means
taxable income of £50,000.
This is over the threshold for 40% tax which is set,
for the 2015/2016 tax year at £31,785. Therefore you
would be liable for tax at 40% on £50,000 - £31,875 =
£18,125 of income. This means your tax bill will include
an extra £3,625 tax because you have taken yourself
into the higher rate band.
The important message is to be aware of the tax
consequences of taking income from your pension and
if you are able, consider from year to year how best to
minimize the tax due by perhaps taking more pension
income in years where other income is lower.

8. 8
Annuities – the impact of changes
Under the pensions freedom changes the rules on
annuities are being relaxed.
Annuities provide pensioners with a guaranteed
income for life. This comes at the very heavy cost
of ‘selling’ your fund to an insurance company. The
Government has long recognised the very bad value
that annuities offer to prospective retirees and this fact
has been one of the main driving forces behind the
radical new pension freedoms.
The bottom line is that no-one is required to
purchase an annuity, and as a result annuity sales
have collapsed. There will be occasions when an
annuity purchase is still the best option, but if you are
considering one please shop around for the best deal
and make sure you have explored all options before
committing yourself.
This is also an area where specialist professional advice
is to be strongly recommended.
It is possible to use just some of your pension fund
to purchase an annuity and choose other retirement
options with the remainder of your fund.
Not yet on the statute book but under consideration
by the Government is a change in law that will allow
people who have purchased annuities to effectively sell
them back to the insurance company. This would give
people stuck with annuities and urgently needing a
cash lump sum the ability to undo a previous decision
and end up with a fund.
We need to wait and see if this legislation arrives and
how it will work, but more flexibility in the pensions
marketplace is always welcome.
Traditional annuities
Traditional annuities can be level or they can increase
over time. Future increases can be at a fixed rate,
or in line with inflation, like RPI (retail price index).
Traditional annuities are not permitted to decrease
except for very limited, specific circumstances.
You can use your pension fund to purchase a
traditional annuity that will provide you with an income
for the rest of your life.
You can opt to have a dependant’s pension included,
usually for your spouse, so the pension can continue to
be paid to them if they outlive you. This can be at the
same level, or at a reduced level, for example 50% of
the pension paid to you.
You may also choose an annuity with a guarantee
period of up to 10 years. If you die within the
guarantee period then your pension can continue to be
paid to your beneficiary until the end of the period.
New flexible annuities
With the introduction of the new pension freedoms,
we expect more innovation in this area and hopefully
greater value for potential clients. One example of
extra flexibility is that now annuities can decrease as
well as increase. If you choose this option then it will be
stated in the contract when you start the annuity.
Choosing an annuity that decreases might be a good
idea for someone who is expecting their income needs
to drop at a later date, for example when they pay
off their mortgage or start receiving income from the
state pension.
If you purchase an annuity that allows decreases in
income this will be classed as flexibly accessing your
pension benefits and the amount you can contribute to
your pension will be restricted to £10,000 as we have
discussed.
The new more flexible rules also allow guarantee
periods for annuities to be longer than 10 years.
Tax treatment
All annuities are taxed at your marginal rate of income
tax.
Death benefits
Under an annuity contract death benefits (if any) are
in the form of a guarantee period or dependant’s
pension. Once any guarantee period has expired and
on the death of a dependant (if a dependant’s pension
has been included), there will be no further death
benefits.
Most importantly, when you purchase an annuity
you lose your fund – that’s the ‘purchase price’ of the
income for life. This is in contrast to drawdown, where
you keep ownership of the fund and live on the income
it generates.

9. Pension Wise – the new Government
guidance service
The new pension freedoms offer far greater flexibility
in how you access your pension than ever before. And
many more choices that do complicate the landscape.
To help you understand the options and make the
right choices, the Government has introducted a new
service – Pension Wise – which we recommend that
you benefit from.
What is the Pension Wise service?
Pension Wise offers free, impartial guidance that can
help you understand the options available to you
when you come to retire. It is not a substitute for full,
financial advice.
So the service explains options but does not
recommend specific products or investments. There is
a very clear line between guidance, offered by Pension
Wise, and pensions advice which can only be given by a
regulated financial advisor.
You can access the guidance online, over the telephone
from The Pensions Advisory Service and face-to-face at
your local Citizens Advice Bureau at no cost.
The Pensions Wise service is designed for people
approaching retirement and is available at zero cost!
To access the Pension Wise service simply go to
www.pensionswise.co.uk to get started.
Note that Pensions Wise will provide appointments
for people who are approaching the age of 55 and
have a defined contribution pension. They do not deal
with defined benefit (also called final salary) pensions.
You can get advice about those from The Pensions
Regulator www.pensionsadvisoryservice.org.uk
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10. 10
Next Steps
Thank you for reading this
Special Report. I hope you
have found it interesting
and valuable.
Gemini Business Centre
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Contact details
If you have any questions about
your final salary pension
please email me: Rod Thomas,
rod@avantiswealth.com
I will always reply personally.
If you have understood and find
resonance with the concepts and ideas
shared in this Special Report, it’s time to
take action. This is what my company,
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• Expected income in retirement
Armed with this information you can explore
options to do better.
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11. 11
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THE RICHER RETIREMENT SPECIALISTS