Flexi-Access Drawdown Tax Calculator - work out the tax consequences of encashing whole pension pots.
The purpose of this calculator is work out the tax consequences of encashing one or several Flexible Drawdown pension plans in their entirety.
- Work out potential tax liabilities
- Calculate any reduction in your tax-free personal allowance
This calculator is only to be used for Flexible Drawdown plans that were commenced or altered after April 2015. Anybody who wishes to encash a pension plan that commenced before this date would need to enter Flexi-Access Drawdown in order to do so.
Encashing whole pension plans
Although there is a lot of interest in this area, there are also lots of potential pitfalls in doing so, with tax consequences being the first one to look out for.
When considering encashing a pension plan, it is not as straightforward as closing a bank account and withdrawing your savings. Existing pension plans were set up on the basis that they would provide pension benefits, and the terms of these contracts usually cannot be altered. Therefore, in the vast majority of cases, anybody considering this option would in all likelihood need to transfer their pension funds to a Flexi-Access Drawdown contract and then take a one-off withdrawal of the balance of their pension funds.
About Flexi-Access Drawdown
As the name implied, the rules around Flexi-Access Drawdown plans were designed to be more flexible and less onerous than under previous Pension Drawdown arrangements.
(If you need a complete overview about what Pension Drawdown is, view this page first
.) Originally, Drawdown plans were designed to allow individuals to access their pension funds at retirement without the need to commit to purchasing an annuity. Whilst considered a great step forward when they were first introduced, they have faced increased criticism due to the fact that income levels were often considered restrictive. This is in part due to the fact that levels of income were dictated by GAD Rates, currently at an all time low.
Under Flexi-Access Drawdown, there are NO LIMITS on the levels of income that can be taken, including the whole value of the pension fund. (However, you will still be charged tax on the withdrawals). Some commentators have compared it to a bank account, but the charges levied and tax consequences means that it is not a like-for-like comparison. Also, unless you plan to withdraw your entire pension on day one, it is likely you will be invested in assets other than just cash.
Generic Tax Issues relating to Flexi-Access Drawdown
Freedom to withdraw whatever you want does not alter the tax consequences, which have not significantly changed. The main points to bear in mind.
- The Tax-Free Pension Commencement Lump Sum remains the same, which means 25% of your pension funds can be withdrawn free of income tax at the outset.
- Any further withdrawals are subject to your income tax at your marginal rate, just like other income.
It is important to also note that Emergency Tax is likely to be applied when you encash a whole pension plan, and this will inevitably incur an even higher tax charge, although any excess tax paid can be reclaimed at a later date. You can use this calculator to work out any emergency tax charge.
The other other significant change is in relation to the death benefits. If you were to die whilst taking benefits from a drawdown plan, individuals previously faced a penal 55% tax charge on the fund when passed to beneficiaries. The new rules are:
- On death before age 75 the fund can be passed on tax-free, whether as a lump sum or as a drawdown pension.
- If death occurs after age 75, if the fund is passed on as a lump sum, a tax charge of 45% will apply. However, if passed on as a drawdown, the beneficiary will pay tax on the income at their marginal rate.
Main Tax Issues to consider when encashing entire pension pots
The main issue, as highlighted above, is that in most cases anybody undertaking this course of action will suffer a significant charge to higher rate income tax, and possibly even to additional rate tax at 45%.
Those with a pension fund worth £30,000 or less can already use the 'triviality' rules to encash their pension benefits, on the basis that the amount is too small to buy an income for life. Also, the 'small pot' rule means that if you have a pension worth less than £10,000, you can encash up to three such pension pots.
Therefore, only those with pension funds worth more than £30,000 are likely to use the Flexi-Access Drawdown route. However, the most important point to remember is that any money withdrawn from a pension plan (excluding any tax-free lump sum) will be added to your other income in the relevant tax year, and be taxed as income.
Given that the current basic-rate income tax threshold is £37,700, it is very easy to end up in the higher-rate bracket. As an example, if your other income for the tax-year is £10,000 and you encash a pension fund worth £50,000 (after a tax-free lump sum has been paid out), then your taxable income for that year is £60,000, and you are going to face a 40% tax charge on a significant amount of your income.
The effect on your personal allowance
Another side-effect could be a reduction in your personal allowance. For every £2 earned over £100,000, your personal allowance reduces by £1 until it is completely removed. This means that the proportion liable to higher-rate tax increases.
As mentioned above, encashing a pension fund is not like closing a bank account. Other than under the 'triviality' rules, you are going to going to have to transfer into a Flexi-Access Drawdown Pension Plan, and there are going be charges involved. At the very minimum there will be charges to set up the plan, and possibly charges levied to withdraw the funds. These vary between different Insurance Companies and Pension Providers.
You should consider whether you actually need to withdraw the funds, and how much you will metaphorically have in your pocket after taxes and charges are taken into consideration. It may be more tax efficient to stagger withdrawals over a number of years. If you are a basic-rate taxpayer, it may make more sense to withdraw just enough to stay within the basic-rate income-tax band. Our Flexi-Access Drawdown Calculator
will allow to calculate the effects of staggering withdrawals over several years.
If you are unsure about the best course of action, it may be worth seeking Independent Financial Advice and looking at all the options available to you.
The Calculator is straightforward to use. Just enter your current taxable income, personal allowance and the aggregate value of the pension funds that you are looking to encash.
Use of this calculator does not constitute a recommendation to use pension fund withdrawal. If you are considering going down this route, we recommend that you seek Independent Financial Advice in the first instance, as there may be more suitable options in your particular circumstances.
The figures given by this calculator are only for guidance purposes - whilst we aim to ensure the accuracy of our calculators, we can take no responsibility for the usage made of the calculations generated on this site.