Retirement Planning: allowances, benefit options and state pension mechanics
Retirement Planning covers accumulation and decumulation: how much can go in, how relief is given, when money can come out and how it is taxed. The exam expects current allowance figures and clean arithmetic on crystalisation and withdrawals.
Funding the pension
Annual allowance is £60,000, tapered by £1 for every £2 of adjusted income above £260,000 down to a £10,000 floor, provided threshold income exceeds £200,000. Unused allowance from the previous three years can be carried forward only if the member was in a pension in the year being carried forward. Relief is at the marginal rate: net pay gives relief automatically, relief at source adds 20% and higher-rate relief is claimed, and salary sacrifice saves national insurance for both parties. Non-earners can contribute £2,880 net (£3,600 gross). Auto-enrolment minimum is 8% of qualifying earnings between £6,240 and £50,270, with at least 3% from the employer.
Taking benefits
Normal minimum pension age is 55, rising to 57 in 2028. The lifetime allowance was removed from 6 April 2024 and replaced by the lump sum allowance (£268,275) and the lump sum and death benefit allowance (£1,073,100). A pension commencement lump sum is normally 25% of the fund, capped by remaining lump sum allowance. Flexi-access drawdown and UFPLS are taxed at marginal rates; the 25% element of a UFPLS is tax-free. Taking taxable income triggers the £10,000 money purchase annual allowance. The full new State Pension is £221.20 a week in 2024/25, needs 35 qualifying years and at least 10 to receive anything; deferral adds roughly 5.8% a year.
Worked example
Amir, 60, has £500,000 in a SIPP and £20,000 of other taxable income. He needs £50,000. A £50,000 PCLS is tax-free but crystallises £200,000, leaving £150,000 uncrystallised. A £50,000 UFPLS gives £12,500 tax-free and £37,500 taxable; his personal allowance is already used and the £37,500 fits within the £37,700 basic rate band, so tax is £7,500 and net £42,500. The PCLS route is £7,500 better on this withdrawal, but the remaining fund must then be planned.
Traps that cost marks
Assuming 25% is always available after earlier crystallisations; believing a PCLS alone triggers the money purchase annual allowance; carrying forward allowance without scheme membership; quoting the abolished lifetime allowance as a tax charge; ignoring how drawdown income can enter the personal allowance taper; treating the State Pension as tax-free.