Pension consolidation and phased drawdown for 'freedom and choice'

Not everyone will be able to access all the new pension freedoms through their current pension scheme. Consolidating older pensions into a more modern vehicle may not only allow greater flexibility on how income can be taken, but could allow flexible access without cutting funding limits.

A case study

The client

Julie's Objective

A Solution

Transfer at least one of Julie's current pension funds into a SIPP before the end of the current tax year;Designate the SIPP for capped drawdown, again in the current tax year. This doesn't mean that the whole fund has to be crystallised - if the SIPP has a single arrangement setup, even moving just a nominal value into drawdown will allow Julie to crystallise further funds later, without losing her £40k annual allowance.

Consolidate all other schemes into the same SIPP. It won't matter if this is done in the same or the next tax year.

Flexible access: Julie will have a flexi-access fund of £600k that she can draw on at any time. From this, she can take just tax free cash up to £150k, a mix of tax free cash and income, or just income on its own from any crystallised parts of the fund. This will allow her to plan her income tax efficiently, while giving her access to emergency funds should the need arise.Options open: If she's likely to make a future contribution in excess of £10k, Julie should keep any income taken within the capped drawdown limit. This way she'll retain an annual allowance of £40k, and still be able to carry forward any unused allowances from earlier years. This could be useful if, say, she wanted to use her ISA to make pension contributions while she still has earned income.

Unlimited income: If she's not likely to make future contributions, she can take whatever income she wants from crystallised funds.

TFC only: Returning to example 1, if she still needed £7,500 of net spendable ‘income' to supplement her salary, she could take this all out as tax free cash, meaning that she would only need to withdraw £7,500 from her savings, and not £10,000.

Tax planning: Alternatively, she could take a mix of tax free cash and income, perhaps keeping the income element within the basic rate band, and so avoiding higher rate tax (see example 2**). In this way, only £8,000 needs to be withdrawn from the pension.

Tax-efficient legacy: When she passes away, any remaining funds can be nominated for her children, free of IHT. The kids can access their inherited pension at any time. The funds will be tax free if Julie dies before 75. If she dies aged 75 or over, any withdrawals are only subject to income tax at the children's marginal rates - and they can choose when to access them, giving some control over the tax they pay. The inherited funds can be cascaded down the generations in this way.

Calculations* Example 1


Spendable income

Withdrawal from personal pension 


Tax free cash = £10,000 x 25%£2,500

Balance of £7,500 taxed as income:£2,500 @ 20%£500£5,000 @ 40%£2,000

Net income£7,500 - £2,500£5,000

Total net spendable income£7,500* Example 2CalculationsSpendable income

Withdrawal from SIPP£8,000

Tax free cash

£5,500Balance of £2,500 taxed as income:£2,500 @ 20%£500

Net income£2,500 - £500£2,000

Total net spendable income£7,500

The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.