Pensions: Are they in danger of getting sexy?

Hands up all those who were avidly listening to George Osborne’s speech at the Conservative Party Conference this year. You didn’t put your hand up?

Well, you may have missed the announcement of yet another series of tax changes to private pensions; this time largely around the tax treatment of pensions on death. Such announcements are normally reserved for March Budgets and Autumn Statements, so the timing came as something of a surprise, albeit a welcome one.

Pension rules

What currently happens to your private pension when you die?

At the moment, your pension fund can be taxed at a rate of up to 55% on death. Let’s say you die with a £200,000 pension pot, Mr Osborne swipes £110,000, leaving your beneficiaries with only £90,000. Not sexy at all!

New flexible drawdown rules already announced

The more flexible income withdrawal rules – otherwise known as ‘spend your pension on a Lamborghini’ – are now just around the corner. From April 2015, anyone over the age of 55 with a private pension will be able to draw out as much of their pension savings as they like (once certain criteria are met of course).

Conventional wisdom for many of our clients would therefore be to consider increasing their pension withdrawals. Why leave money in a pension if it’s going to be taxed (eventually) at 55%?

So what’s changed now?

As of April next year, instead of paying the up to 55% tax charge, you’ll also be free to pass on your unused private pension to a beneficiary of your choosing when you die.

With approximately 320,000* people retiring each year with private pension pots, the newly announced rules will be a positive change that will affect many…and potentially even change their retirement planning completely.

What does this actually mean?

It means you can now view your pension as a tax-efficient savings and wealth preservation vehicle to pass from generation to generation. Or a sexy savings plan!

With the various changes due in April 2015, what other plan will give you all of this?

  • Up to 45% of the contributions paid for you in tax relief
  • The ability to draw 25% of the accumulated fund as a tax-free lump at age 55
  • The facility to draw additional (taxable) sums as and when you need them
  • A pension fund which can pass tax-free into the ownership of future generations or provide them with (taxable) income or lump sums as required

Can you benefit from this new rule if you’re in the NHS Pension Scheme?

The new pension rules do mean that those in the private sector or a funded public sector scheme may be able to transfer their pensions to benefit from the changes.

Those in unfunded public sector schemes, like the NHS Pension Scheme, sadly won’t be able to do this. A good proportion of our clients already have pension lifetime allowance issues with their NHS pension and are using other investment vehicles, such as VCTs, to achieve their retirement goals.

Whilst for them the new rules may not alter their financial plans, the recent announcement DOES greatly change things for non-NHS Pension Scheme members and their spouses.

For one, the greater tax saving opportunities that the new private pension rules provide could mean you need to make changes to your financial portfolio and/or retirement plan. It’s certainly worth reviewing your pension provision with your independent financial adviser to find out…and your Will for that matter too!

Have you factored the new private pension rules into your retirement plan yet? Let us know below

Sources: * HM Treasury 29 September 2014

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