I am one of the most highly qualified pension specialists advising in the UK. Twenty years of study and experience turned on its head by the chancellors announcement that we are to have Flexible Access pensions from 6th April 2015. It’s taken me a few months to get to grips with the way pensions will best serve clients in the future and it is real sea change. It’s hardly surprising that you may still believe that you should rip as much cash as possible out of your pension – grab it and run – after all the alternatives: buying an annuity (income for the rest of your life) or lose 55% to the tax man if you die without spending it, are unattractive.
STOP! It’s not like that anymore. In fact its madness to take money out of your pension unless you are intending to spend it. There is nothing to be gained by taking money out of the pension to reinvest. Pension wrappers protect the fund from income and capital gains tax. The only place you enjoy the same tax privileges is ISA and offshore bonds but why bother with the trouble and expense to get an equivalent investment? It makes greater sense to leave it where it is until you need it.
A really important change is that you can now (from 6th April 2015) nominate anyone as a beneficiary of your pension in the event of your death. The old rules only allowed the pension to continue a spouse or financial dependent. So if you have not spent all your pension before you die it can be passed on to family or friends. If you die before age 75 the recipients can chose a tax free lump sum or income. After age 75 a lump sum would be taxed at 45% but an income would only be taxed at the normal tax rate of the beneficiary, this would be 20% for basic rate tax payer. I can well imagine pension funds being left to grandchildren who withdraw them as young adults at college and university when they are non-tax payers and thus they get tax free income.
It has always been the case that pensions are generally outside of your estate. The fund is separate from your other wealth and does not get aggregated with the rest when assessing the estate for Inheritance Tax charges. I can see a big win for clients who fund pensions gaining the tax relief on contributions. They then enjoy tax free growth and pass the fund onto the next generation without Inheritance Tax. In fact it would make sense to spend your ISAs and other wealth to support you in retirement before you dip into the pension.
It seems to me that far from encouraging people to strip out their pensions I am much more in favour of using them as a tax efficient wrapper in which to grow wealth and as a trust to pass on wealth to future generations. This conclusion could not be further away from the Lamborghini scenario mentioned in the press (the risk that pensioners would blow their entire fund on a sports car and be poor in retirement as a consequence).
If you want to know more about pensions an retirement planning – a new era – then call the office or email us and we will send you a complimentary guide.