The simple answer to this question has always been yes - the problem has always been explaining how – until now!
Our selected provider will enable you to take a tax free lump sum from your pension policy (assuming you are aged 55 or over) and let you continue to make contributions toward that pension. Furthermore at some point in the future you can take tax free cash from the new contributions you made after you took the first lump sum.
Using just one pension policy you can make regular contributions, single contributions, employer contributions or even a combination of all three – you can start or stop these contributions as you wish. You can also take further benefits such as lump sums and / or income when you wish, within the limits set by Her Majesty’s Revenue and Customs. Our provider keeps tabs on the status of all your various contributions thereby ensuring that you use them in line with pension legislation.
There are many benefits in operating the policy in this way, but most importantly it keeps things simple for the client – one provider, one policy, one solution.
Customers with large fund values could also benefit from a fund management discount on their new contributions as the money is all within the one policy and added to the value of the total fund.
The maximum tax free lump sum you can take is 25% of your fund value. If you wish, our provider will allow you to take less than this at outset, thereby preserving the unused element until another time, subject to movement in investment performance.
Many providers don’t operate their policies in this fashion, so for those customers who do not want to use our provider or our service, here is the more detailed explanation.
When you take a benefit from a pension plan, such as tax free cash, the plan becomes known as crystallised (typical confusing financial services jargon !!). This simply means that you have taken benefits from it and your provider (or any future provider) needs to be aware of this so that they treat the remaining money within the fund according to the correct pension rules. As an example, if a customer has a fund worth £40,000 and they take £10,000 (25%) as a lump sum, then the remaining 75% or £30,000 can only be used to provide income. However if the customer doesn’t want the income now, then by the time they retire the £30,000 could be worth more or less depending on investment performance. Even if it is worth more it can still only be used for income because the fund is now crystallised.
By default pension contributions are classified as un-crystallised, obviously this is because you have not yet taken benefit from them. As with the remaining 75% sitting in the crystallised fund, the value of the un-crystallised pension contributions can also rise and fall. However unlike the crystallised fund these don’t only need to be used for income, as a customer is entitled to take 25% of them as a tax free lump sum. Most providers would struggle to manage a single pension fund that contains both crystallised and un-crystallised funds. They therefore use a two pension policy approach.
The two policy approach means that the fund used to provide the customers first lump sum becomes closed to new contributions. This enables the policy provider to easily identify this money at some later point when you decide how you want to use your pension fund to provide income. If you want to make further contributions before retirement these new contributions will need to go into a new pension contract. The customer ends up with two pension funds, one crystallised the other not.
Having explained the process, you may perhaps feel that the two policy option isn’t too onerous. We nevertheless feel that our one policy solution is simpler and possibly more cost effective – but then we would say that – wouldn’t we ?
If you would like more help in understanding how to make pension contributions after taking a lump sum, please feel free to call us on 020 33 55 4827.