Crystallised Pension

Understanding pensions, especially the jargon, can be confusing. One thing we believe in at Spectrum Wealth Management is helping you gain a greater understanding of your retirement savings and how they work, so you can use your pension benefits tax efficiently and enjoy a longer lasting retirement fund.

With the new pension freedoms given to 55 year olds, you get to decide what to do with the personal and workplace pensions you’ve accumulated during the last three decades.  

So it makes sense to find out about some of the terminology used when discussing your pensions and retirement benefits and what they mean.  

A term often used to describe whether a pension has been accessed or not, is ‘Crystallised’.

What is a Crystallised Pension?

Simply put, a personal or workplace pension becomes ‘Crystallised’ once you start to draw money from it. The opposite term ‘Uncrystallised’, is used to describe a pension that has been left invested until you’re ready to start using it to draw an income.

When it comes to deciding what to do with your pension pots, we will always advise that you discuss your retirement plans with a regulated financial adviser that specialises in pensions.  

What does Crystallising your pension mean?

Crystallising is the process of accessing the funds in your workplace or personal pensions.  

To activate the process, you extract the first 25% of the amount you hold in your pension as a tax free lump sum. This first amount is called the ‘Pension Commencement Lump Sum’, or PCLS. 

The remaining 75% of your money can be kept in the fund until you’re ready to transfer it to a >flexi-access drawdown pension< or use it to buy an annuity.

What are the rules surrounding Crystallised Pensions?

The main rule is your age. You can start Crystallising your personal pensions or defined contribution pensions straight after you’ve celebrated your 55th birthday. 

If you’re younger than 55 and need to access your retirement savings because of ill health, you can apply to your pension fund provider to request early access. However, strict conditions will need to be met before the funds can be accessed. 

What types of Crystallised Pension are there?

There are two types of Crystallised pension. A flexible Income Drawdown style pension and an Annuity.

An Income Drawdown pension gives you unfettered access to your pension savings.  Because they remain invested, your drawdown funds have the opportunity to grow while you’re enjoying your retirement benefit and drawing an income. 

A pension Annuity on the other hand is rigid. Once bought, it cannot be changed to an investment product like a flexi-access drawdown pension.

Purchasing an Annuity limits you to receiving a set amount every month for the rest of your life. Typically these amounts are low because they are designed to last you for the whole of the rest of your lifetime, no matter how long you live.  

Income drawdown and pension contribution

Getting the timing right when making your first pension drawdown is crucial, as it has implications on any pension contributions you make in the future. 

Also, you need to be absolutely sure you’ll have enough in your pension fund to last you throughout your retirement years.

We can help you arrive at the most appropriate decision based on your individual personal circumstances. 

Can I make pension contributions after drawdown?

You can definitely carry on contributing to your pension pot after you start drawing down your pension funds. However you will not benefit from as much tax relief as you would before activating your pension and drawing an income.  

Once your pension is Crystallised, it sits within your estate for taxation. If you are drawing income from it, HMRC will restrict the amount you can contribute back into your pension pot each year from £40,000 to £10,000.  

It’s important to take advice about making ongoing pension contributions while making withdrawals from your pension. HMRC may view this as ‘recycling’ to gain a tax advantage and impose hefty surcharges of up to 40%. 

Pension drawdown and Tax Planning

As soon as you make the first withdrawal from your pension (ie your Crystallise it), it becomes part of your taxable estate. 

Of course, you can take the first 25% of your pension benefits tax free, but after that you’ll pay income tax charged according to your tax band on the remaining 75%. Remember you don’t have to take your 25% tax free cash all in one go, you can draw down smaller lump sums.

Something to find out more about when planning how much tax you could pay in the future, is the Lifetime Allowance. This is the total amount of pension benefit you can draw down during your lifetime, without paying additional tax.

The lifetime allowance for 2020/21 is £1,073,100 and increases with inflation. When you reach 75, your pension scheme administrator uses a formula to calculate your uncrystallised pensions to test against the lifetime allowance. 

Uncrystallised funds pension lump sum VS Drawdown

An Uncrystallised pension is one that hasn’t been activated for drawdown yet. If you’re not ready to Crystallise your pension, but want to access the funds, you can still make a lump sum withdrawal.

This is called an ‘Uncrystallised Funds Pension Lump Sum’. The 25% tax free rule applies and because it sits outside your taxable estate, you can continue to make pension contributions into your pension pots within the £40,000 limit.

The difference between the two is access and flexibility.

How can Spectrum help?

As specialists and pensions experts, we can help you plan your retirement strategy to ensure your pension funds work hard for you in the years leading up to your retirement and in the years beyond.