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More flexibility with your pension pot – should you spend or save?

13 January 2016

New pension flexibilities mean that you can now withdraw your entire pension fund once you reach the current eligible pension age of 55 without the need to purchase an annuity. The relaxation of the rules could potentially free up substantial amounts of money, and allow greater freedom to plan your future, but should you spend or save your pension pot?

Whilst the new pension freedoms have generally been good news, an area which has gone a little under the radar has been the change to taxation of pension death benefits. Peter Jarvis, from Myers Asset Management team explains how pensions can now play an important role in inheritance tax planning.

In the past, a 55 per cent tax charge would have been levied on a pension fund passed to a non-dependent beneficiary post age 75, as well as crystallised monies before age 75. Under the new rules, it is now possible for your entire pension fund to potentially be passed onto your chosen beneficiaries in a tax privileged manner.

The new rules also allow your beneficiaries to subsequently pass on any of these inherited pension funds to their own successors, which gives the potential to pass pension funds down through the generations without ever falling into anyone’s estate for inheritance tax purposes. Technically, there is no end to this planning as a successor could also pass their remaining funds down to their own beneficiaries.

This beneficial tax change might make you reconsider the usage of your pension monies. For example, if you have sufficient income from non-pension assets to meet your retirement needs, you might decide to reduce or even stop drawing money from your pension pot and allow the pension funds to accrue. This strategy could effectively enable you to pass more onto your beneficiaries inheritance tax-free. As you spend more of your chargeable estate as a result, it could reduce your inheritance tax bill even further. Such a strategy is not suitable in all cases, and of course could be detrimental if pension rules were to change again in the future.

However, there is a potential sting in the tail where a discretionary trust has previously been nominated to receive the death benefits. These were often used so the death benefits remained outside of your beneficiary’s estate and also allowed you to retain an element of control from the grave.

If a trust exists beyond age 75 then there is an unavoidable 45 per cent tax charge when the lump sum death benefits are paid over to the trust, which is potentially subject to inheritance tax charges.

Whereas if the pension monies were passed directly to the potential beneficiaries, the pension monies could be retained within a pension wrapper and an income drawn from it, thus only paying tax at their marginal rates on any withdrawals. However, control would be lost over how the monies can be used and the future distribution of subsequent death benefits thereafter.

If you have a trust is in existence, it should be reviewed to ascertain whether it is still required within the new regime, and especially whether it is appropriate beyond your 75th birthday.

For advice on pensions and inheritance tax planning contact Peter Jarvis at Myers Asset Management on 01782 557 233.

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.

 
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Peter Jarvis

DDI: 01782 557 233



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