Simplification is the key - Centre for Policy Studies

APPENDIX V
PRE-RETIREMENT ACCESS TO PENSION SAVINGS:
ILLUSTRATION OF AN ESCALATOR
Assuming a saver is permitted to withdraw up to 25% of his pension savings’ prevailing
asset value of £X, the next £X of contributions would then not be eligible for upfront tax
relief. The saver’s ability to make tax-free withdrawals is “restacked” by subsequent asset
growth and contributions.
Consider an example with a five year withdrawal interval:
(R-15 = Retirement age less 15 years, etc)
Age R-15 R-10 R-5 Retirement
Asset value £200 £260 £200 £300
25% of asset value £50 £65 £50 £75
Less cumulative actual withdrawal £0 £20 £45 £45
Maximum permitted withdrawal £50 £45 £5 £30
Actual withdrawal £20 £25 £0 £30
Post-withdrawal asset balance £180 £235 £200 £270
Interim asset growth £50 -£55 £60
Gross contributions £30 £20 £40
of which, tax relief on £10 £0 £35
Tax relief overhang* £0 £5 £0
* The tax relief overhang is to prevent withdrawals being round tripped into new
contributions on which relief is gained. If there are no subsequent contributions, any
overhang becomes irrelevant.
This structure does not address the risk of asset prices falling in a period to the extent
that cumulative withdrawals then exceed 25% of the asset value. This is only an issue at
retirement; if so, the post-retirement lock-in amount could be increased by the shortfall.
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