Use Pension As A Bank Account

Published / Last Updated on 16/10/2014

Video explains how to use your flexible pension drawdown just like a bank account with part tax free 'income' and part taxable income.


“Hello there, today's date is 14 October. The date I am shooting this video 14th of October 2014 and today, the Chancellor of the Exchequer has made quite a few headlines suggesting to people that with the new pension flexibility rules we can all use our pension fund literally is a bank account.

[And] the simple suggestion for this is with your pension fund that you’ve built up, a quarter of your pension fund is available as a tax-free lump sum and the balance of your pension fund, 75% of your pension fund, what you take from that as an income or indeed as a drawdown is taxable income.

So a quarter, 25% is tax free, 75% is potentially taxable. Now, what the Chancellor said, and this will be included as part law, is: people will be able to be more flexible with the tax-free cash element that they drawdown from their pension fund. So what we have so far is people, when they reach retirement date, they take their whole fund out as a lump sum, they take the 25% out as a tax-free lump sum if you live in the United Kingdom and the balance then they either:

• left it invested in their pension as drawdown or
• they’ve bought an annuity or
• they’re starting to drawdown small amounts of income from their pension fund.

But the whole of the pension fund is then in pension ‘jingo’ terms has been ‘crystallised’ [this means it has been ‘taken’].

What the government are proposing is you can now be much more flexible in how you draw funds from your pension where, if you start making regular withdrawals from your pension, take part of your tax-free lump sum and part of your normal pension income (that would usually be taxed).

[So] you then, indirectly, you have part tax-free income. Now, the government has suggested this is something new. I'm suggesting to you it's not something do many, many people already use their pension funds like a bank account.

What we’ve had to do so far is we would do something called ‘phased retirement’ where, if you can imagine, we divide your pension, let’s say you’ve got £100,000 in your pension fund, we actually divide it, we segment it into 100 or 1,000 little mini policies.

So let's say you’ve got £100,000 and we divide it up into a hundred little segments and then if you want to phase your retirement you cash in, let's say, five of those hundred policies and of those five policies part you receive is the tax-free lump sum element and part as taxable income.

[So] that flexibility is already there but I guess what the government are doing is then looking to make pension funds even more flexible for you when you don't have to do all of this segmentation. You can literally keep it as one pension pot and you can draw down as much or as little of the tax-free lump sum element or the taxable pension fund element where you draw it down as taxable income and you can mix and match to suit your needs and effectively treat your pension fund just like a bank account. Drawdown as much or as little when needed.

So that's what the Chancellor is proposing: the ability to use your pension fund as a bank account. I'm suggesting: yes it looks nice and pretty pictures but pretty much it already available now for those people who would look at some form of phased retirement anyway. But pension funds as a bank account I've always said that's how you should think about your pension fund anyway.

Thank you so much for watching.”

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