Pensions Update: The need to review
There have been more big changes to pension rules that you need to be aware of: namely that reduced contribution and fund limits mean that many are going to risk paying excess tax charges if they don’t act; the freedom to draw pensions without limit is welcome, but beware the tax. On top of this, the improved inheritability of pensions means perhaps you shouldn’t draw them at all…
Firstly, Annual Allowances for high earners are being reduced from April 2016, potentially down to just £10,000 per annum for those with adjusted income (to include pension contributions made by an employer) of over £150,000. There is an opportunity to use the current £40,000 allowance before 6 April, and potentially to carry forward unused allowances for the previous three years. Care needs to be taken as the rules for “Pension Input Periods” have changed.
Secondly, the Lifetime Allowance (the maximum value of all pensions beyond which a tax charge will be payable) is reducing again, from £1.25 m to £1m on 6 April 2016. There are opportunities to protect existing limits, but these are time-sensitive, so you need to check whether you will be affected. For clients already 55, this may involve drawing some benefits now before the limit reduces. For younger clients, even funds currently as low as £500,000 may be caught.
Thirdly, from April 2015, the new “freedoms” allow you to draw pension funds flexibly from age 55, including the ability to spend pension pots (on that Maserati) in one go. Beware the tax if you do so, and bear in mind that pensions were intended to provide a lifetime income, and (unlike Maseratis) are free of Inheritance Tax (IHT).
This brings us to the significant improvement in the rules around the payment of pension funds remaining at death. The old distinction between “crystallised” and “uncrystallised” funds is gone, and the only important thing now is age: on death under 75, pension funds can be passed tax-free; after 75, they will be taxed at the beneficiary’s marginal rate of income tax. Either way, they should not form a part of your estate for IHT, and for the first time pensions can be passed to any nominated beneficiary, rather than just to dependants or charity. It is important, therefore, that you review the death benefit nominations you have in place for your pensions, and bear in mind that nominating a Trust may no longer be the most appropriate course.
We would urge you to contact your pensions provider/adviser to ensure that you take the appropriate actions in light of these changes. Alternatively, do please contact us directly or through WSM and we’ll be pleased to assist you. Punter Southall Financial Management is an independent, whole of market financial adviser regulated by the FCA.
Duncan Macpherson is a Chartered Financial Planner at Punter Southall Financial Management.