Drawdown’s sting for April pension delayers

Many people retiring now also want to take advantage of the greater pension freedoms next April.  They may be thinking about using a drawdown pension to avoid buying an annuity, but they should tread carefully, according to financial services provider, NFU Mutual.

While drawdown allows you to take lump sums now, there’s a sting - pension funds that have been moved into drawdown are subject to a 55% tax charge on death if they’re paid out as a lump sum.

Stephen Berry, personal finance specialist at NFU Mutual, said: “Anyone with an eye on next April’s changes who’s tempted to put all their pensions into drawdown now should take care. Drawdown may be the best choice for some people, but many could be better off delaying and using one of the new ways of taking money from a pension next year.

“One of the options will be the snappily-titled Uncrystallised Funds Pension Lump Sum, but this won’t be available for pension money you’ve already put into drawdown.

“With this new option you can take money direct from a pension fund, but the money you don’t take out will be free from the 55% tax charge up until age 75, and will usually be free from inheritance tax.

“With careful planning, this could also result in you paying less income tax over time.

“The new options will make planning more complex but potentially far more rewarding, and this makes doing your research or taking professional advice all the more important. All options should be considered if people are to arrive at the right decision.”

If you’re retiring now and want to delay a decision on your main pension pot until next April, Stephen has identified three main options to help tide you over:

Take money from other investments. Few have the same tax advantages of pensions, so why cash in a pension now when you’ll be free to take money out as you wish from April?     

Use the small pension pots rule. Anyone over the age of 60 can potentially cash in up to £30,000 worth of smaller pension pots to tide them over.

If there’s no alternative, move just a part of your pension to drawdown to give you enough money for the coming months, and leave the rest untouched.