Here we answer a few common questions we are asked about pensions.
Q: What happens to pension funds if the planholder is declared personally bankrupt, are the creditors/ trustee in bankruptcy entitled to claim the benefits and is there any difference between the treatment of pension benefits already in payment and those not in payment?
A: This depends on a few factors. There is a guide in Gov.uk
Q: Is the Uncrystallised Funds Pension Lump Sum (UFPLS) option available to those below age 55 but who satisfy the ill-health criteria?
Q: If a client is age 49 with terminal cancer and has been given a 2 year prognosis, can they take any pension benefits before age 55?
A: Only where the member satisfies the ill-health criteria. HMRC rules allow early payment of benefits where the scheme administrator accepts qualified medical advice stating the member is physically or mentally incapable of continuing their current occupation as a result of injury, sickness, disease or disability and, as a result of their ill-health, they cease that occupation.
However, check the scheme rules which may be more restrictive than this HMRC definition. Some scheme rules only allow early payment where the member is unable to continue in any occupation.
If the member’s prognosis is less than 12 months, the member could be entitled to a serious ill-health lump sum from their uncrystallised pot. The criteria for both options are covered in the Pensions Tax Manual.
Q: Is it possible to take a serious ill-health lump sum from a Drawdown plan?
A: No, you can only take a serious ill-health lump sum from uncrystallised funds.
If the client has an arrangement which consists of both uncrystallised funds and crystallised drawdown funds, (since 16 September 2016) a serious ill-health lump sum payment can be paid in relation to the uncrystallised funds so long as the payment extinguishes all uncrystallised rights under the arrangement.
Prior to 16 September 2016 it was not possible to take a serious ill-health lump sum from the uncrystallised part of an arrangement if some benefits had previously crystallised. Full details of the conditions for payment of a serious ill-health lump sum are in the Pensions Tax Manual.
Uncrystallised funds pension lump sum vs phased retirement
Q: My client is looking to take £1,000pm pension income. Is this taxed the same whether taken as a regular uncrystallised funds pension lump sum (UFPLS) or using “phased drawdown” taking uncrystallised funds to pay a pension commencement lump sum (PCLS) with the balance designated to Flexi-Access Drawdown (FAD) and taken immediately?
A: Yes, both payment types are taxed based on the tax code provided by HMRC with 25% tax free (providing the client has sufficient available LTA) and the rest taxable.
If the tax code is not known, eg at the time of the first payment, payments made may be subject to emergency tax until the tax code is provided. Where possible the provider will rectify under or over payment of tax in following payments in the same tax year. If this is not possible, the member will need to sort out their tax payment with HMRC directly.
Emergency tax reclaim
Q: Which form should a client complete to reclaim excess emergency tax deducted from a pension payment?
A: This depends on the client’s circumstances, eg do they receive other income, have they fully exhausted their pension pot etc. The HMRC service will guide you through this.