Flexible Pension Arrangements - Opportunities and Pitfalls

On 6th April 2015 changes to the pension regime gave people significantly more flexibility when it comes to drawing funds from their defined contribution pension schemes.

Under the new rules, from the age of 55, you are no longer restricted in the amount you can withdraw from the pension fund and any withdrawals over and above the 25% tax-free lump sum will be taxable at your marginal rate of tax in the year you draw the funds.

In addition, if you die before the age of 75, the entire pension fund can be paid to your surviving spouse or children entirely free of tax.

The extra flexibility allows you to carefully plan the timing and amount of pension withdrawals, taking into account any other income you receive, to minimise the tax you will pay.

Before you do anything, we strongly recommend you speak to us for independent financial advice.


The lifetime allowance is a limit on the value of benefits from a pension scheme – whether lump sums or pension income – that can be paid out without triggering an extra tax charge. The allowance will be reduced from £1.25million to £1.0 million with effect from 6 April 2016 and this change is expected to bring hundreds of thousands of taxpayers within the potential charges.

An individual with a pension pot exceeding the lifetime allowance can face a tax charge of up to 70% on pension benefits drawn in excess of the £1.0 million limit. The £1 million limit will be index linked.

With people working longer and retiring later, the compounding effects of tax free investment growth within a pension fund can push modest pension savings above the limit.

For example an individual with a defined benefit/final salary scheme which will in due course provide an annual pension of £25,000, and pension savings of £300,000 with ten years until retirement and 5% per annum investment returns will achieve a £1.0m pension fund without making any additional contributions.

Individuals who may be affected by the reduction in the lifetime allowance can apply for protection which will mean that they can fix their lifetime allowance at the previous rate of £1.25million, but are not permitted to make any further contributions to any pension schemes.

If you believe that you may be affected by these changes you should speak to us.