Category: stakeholder pensions

New Pension Freedoms Bring Opportunities As Well As Risks

Recent years have seen some significant changes to the tax treatment and rules governing pensions and death benefits. Many of these changes have been quite favourable, bringing new freedoms and tax saving opportunities. However, these freedoms go hand in hand with responsibilities and risks. We will look at the most important challenges and ways to ensure your investments achieve the best possible performance, serve your income needs and at the same time remain tax efficient – both in retirement and when your wealth eventually passes to your heirs.

The Changes

The Government has recently changed financial and tax legislation in many areas, but there are two things which are particularly important when it comes to retirement and inheritance tax planning.

Firstly, you now have greater freedom to decide how to use your pension pot when you retire. You can take the entire pension pot as lump sum if you wish (25% is tax-free, the rest is taxed at your marginal rate), you can take a series of lump sums throughout your retirement, you can buy an annuity or get one of the increasingly popular flexible access drawdown plans.

Secondly, you now have complete freedom over your death benefit nominations. Before the reform, which came into effect in April 2015, you could only nominate your dependants (typically your spouse and children under 23). Now you can nominate virtually anyone you wish, such as your grandchildren, siblings, more distant relatives, or even people outside your family. Furthermore, the taxation of death benefits has become more favourable. If you die before 75, death benefits are tax-free (lump sum or income, paid from crystallised or uncrystallised funds). If you die after 75, death benefit income is taxed at marginal rate of the beneficiary (lump sum is subject to 45% tax, but that may also change in the near future). The reform has turned pensions and death benefits into a powerful inheritance tax planning tool.

The Challenges

While the above is all good news, there are some very important restrictions and things to watch out for. Neglecting them can have costly consequences. For instance, the Lifetime Allowance not only still applies, but has been significantly reduced in the recent years (it is only £1m now). Besides the annual pension contribution allowance it is one of the things that require careful planning long before you retire. In retirement, pension income is typically subject to income tax, which must be considered when deciding about the size and timing of withdrawals, particularly if you have other sources of income.

Asset allocation and investment management is another challenge. Maintaining a good investment return with reasonable risk is increasingly difficult in the world of record low interest rates. It is tempting to completely avoid low-yield bonds and other conservative investments in favour of stocks, but such strategy could leave you exposed to unacceptably high levels of risk, particularly in the last years before your retirement. A balanced portfolio of stocks and bonds is often the best compromise, but asset allocation should not be constant in time – it should be regularly reviewed and should reflect your changing time horizon and other circumstances.

Death benefit nominations are another area where changes in financial and life circumstances may require reviews and adjustments, particularly after the age of 75, when potential death benefits are no longer tax-free. For example, if your children are higher rate taxpayers, you may want to change the nominations in favour of your grandchildren, who may be able to draw the income at zero or very low tax rate, allowing you to pass wealth to future generations in a tax-efficient way. If you have other sources of income and are a higher rate taxpayer yourself, you may even choose to not draw from your pension at all and keep it invested to minimise total inheritance tax.

Conclusion

The above are just some of the many things to consider. Depending on your particular situation, there might be tax saving opportunities which you may not be aware of. Conversely, ignorance of little details in the legislation or mismanagement of your investments may lead to substantial losses or tax liabilities. The new freedoms (and related challenges) make qualified retirement planning advice as important as ever before.

 

 

Tax Year End Planning Checklist

The end of the tax year is approaching again; therefore it’s time to think about maximising allowances, minimising taxes and taking all the other steps to ensure your tax position will be as favourable as possible going forward. Although there are still almost two months left, it’s better to start now rather than leave it all to the last days, for some of the necessary steps can take some time to process.

When going through the checklist below, you may find this page useful. It contains all the key thresholds, rates and allowances for 2015-16 as well as 2016-17.

Income Tax and National Insurance

If possible, delaying an invoice (if you are self employed), salary, bonus or dividend payment (if you have a company) until 6 April can save, or defer, a considerable amount of taxes. Company owners should also find the right mix of salary and dividends to minimise taxes. Don’t forget to include all of them when making the decision – personal income tax, both employee’s and employer’s NI, corporation tax and dividend tax.

The key figures are:

  • £5,824 = Lower Earnings Limit – minimum to qualify for State Pension and other benefits
  • £8,060 = Primary Threshold – employee’s NI (12%) kicks in
  • £8,112 = Secondary Threshold – employer’s NI (13.8%) kicks in
  • £10,600 = Personal Allowance – basic rate income tax (20%) kicks in
  • £31,786 = higher rate income tax (40%) kicks in

Many company owners choose to pay themselves a salary equal to the Primary or Secondary Threshold, in order to avoid paying NI, and take the rest in dividends. However, if your company is eligible for the Employment Allowance (first £2,000 of employer’s NI free), it could make sense to pay yourself up to the Personal Allowance (£10,600) in salary. Of course, your other income, family situation and other circumstances could alter the figures and must always be considered.

Pension Contributions

Making pension contributions can save you a lot of money in taxes, as long as you stay within your annual allowance, which is £40,000 for the 2015-16 tax year. At the moment, pension contributions are subject to tax relief at your marginal tax rate, which makes them particularly attractive to higher and additional rate taxpayers.

Normally you need to make the contributions before the tax year end (5 April), but this time it is recommended to act before the Budget Statement, which is due on 16 March.

There is high risk that Chancellor George Osborne will announce important changes which may affect the tax relief. The exact outcome is not known, but experts have been speculating about a flat rate replacing the marginal tax rate (this would effectively reduce or eliminate the tax relief for higher and additional rate taxpayers). The Chancellor has also mentioned the idea of cancelling the pension tax relief altogether and using a completely new mechanism for taxing pensions in the future, perhaps similar to ISAs (after-tax money in and tax-free money out).

It is not clear if this will eventually materialise and when any changes would come into effect. However, pension tax relief has clearly been one of the Chancellor’s primary targets in the effort to reduce the deficit and raise tax revenue. In light of the uncertainty, the safest approach is to make pension contributions before 16 March to avoid potential disappointment.

Note that if you didn’t use your full allowance in the three previous tax years, you might still be able to get that money in, on top of this year’s £40,000. The previous three years’ allowances were £50,000, £50,000 and £40,000, respectively. One condition is that your total contribution must not exceed your earned income for the current tax year. Another thing to watch out for is the lifetime allowance (currently £1.25m, but falling to £1m in April), as exceeding that could be costly when you retire.

NISAs

If you have the cash, you should always use your annual NISA allowance to the maximum. A NISA is a tax wrapper which allows you to build savings and investments without incurring taxes on income and capital gains going forward. The allowance is £15,240 for 2015-16 and it is use it or lose it – if you don’t deposit the money by 5 April, this year’s allowance is gone forever. You may also want to use your partner’s and your children’s allowances (£4,080 per child under the so called “Junior ISA”).

If you have existing cash ISA accounts, now is also a good time to review them and check the interest rates. Banks like to lure savers with attractive rates, only to slash them after 12 months or some other period. In such case you may want to transfer the funds elsewhere. There are two things to keep in mind:

  • Always transfer from ISA to another ISA directly. If you do it via your regular bank account, once you have withdrawn the money, it loses the ISA status (and withdrawals do not increase your annual allowance – that will only change the next tax year).
  • Each tax year you can only deposit money to one cash ISA account and one stocks and shares ISA account.

Capital Gains Tax

You can often save on capital gains tax even outside ISAs. There is an annual CGT allowance, which makes the first £11,100 (for 2015-16) of capital gains tax-free. You need to realise these by the tax year end; otherwise the current year’s allowance is lost forever.

Depending on the investments you are holding, whether there are unrealised gains or losses and whether you want to sell any of them, the decisions to make can become quite complicated, but may save you a lot in taxes. A potentially large CGT bill can be reduced (by crystallising losses) or deferred (if you wait with the sale until 6 April). On the other hand, if you are well within your CGT allowance you can crystallise gains to reduce future taxes.

Always keep in mind that tax issues are an integral part of any investment strategy (and tactics), as taxes can affect net return substantially. At the same time, don’t forget to consider transaction costs.

Inheritance Tax

If your estate is likely to exceed the IHT threshold (£325,000 for individuals or £650,000 for couples), you may want to take steps to reduce it. Estate planning can obviously become very complex, but the easiest thing you can do is make gifts to your beneficiaries. These are subject to annual allowance of £3,000. If you didn’t use the allowance last year, it can still be used now (making it £6,000 in total), but after the tax year end it is lost. As long as you live for seven years after the gift, it is out of your estate.

Other Considerations

The above are the most common points which apply to most people. Depending on your circumstances, there may be other opportunities, further allowances and other things to do before the tax year end. In any case, it is best to discuss your entire financial and tax position with your adviser, as some actions might have unexpected consequences. Don’t forget the key date is 5 April, with the exception of pension contributions where it is safer to act before 16 March this year. Also remember that some actions will require longer time to process and don’t leave everything to the last days.

 

 

 

 

Business owners to profit from pension flexibility

Business owners to profit from pension flexibility
Business owners looking to extract surplus profits from their business will be looking forward to April’s new pension income flexibility. Not only will pension funding remain the most tax efficient way to extract profits, but those funds will also become far more accessible than ever before.

Allowable contributions have the double benefit of reducing the profits subject to corporation tax, without incurring an employer National Insurance liability. Extraction by salary or bonus will reduce profits before tax, but will not side step NI.

The only previous downside for business owners was that pension funds were not as readily accessible as cash. But all that will change from April if the owner of the business is over age 55. This could lead to business owners seeking advice on how to maximise their contributions.

How much can be paid?
Potentially if someone has not paid anything into their pension for some time they can pay up to £230,000 now. This would be done in two stages. First, by using carry-forward from the 3 previous tax years. This amounts to £150,000 using allowances from 2013/14, 2012/13 & 2011/12. Plus, in order to carry-forward they would also have to pay the maximum £40,000 for the current year. Potentially they may also be able to pay a further £40,000 towards next year’s allowance now if their current input period ends in the 2015/16 tax year.

Unlike paying pension contributions personally, company contributions are not limited by the business owner’s earned income. Instead, the company just has to be able demonstrate that the contributions were ‘wholly and exclusively for the purpose of trade’. However, the company would typically need to have enough profits in the accounting year to get the full benefit of corporation tax relief.

The financial dangers of hoarding cash
There may also be a spin off benefit of paying surplus profits to a pension instead of capitalising it:

Inheritance tax
Shares in unquoted trading companies normally attract IHT business property relief (BPR). But cash built up in the company bank account or investments held within the company could be regarded as an ‘excepted asset’ and not qualify for BPR. To qualify for relief; cash has to have been used in the business in the past two years or earmarked for a specific future business purpose. Clients should always obtain professional advice to get clarity on their particular situation.

With many companies still stockpiling cash following the credit crunch, some business owners could be unwittingly storing up an IHT charge. Amounts over and above their company’s usual working capital could be included within their estate.

Paying into their pension could help ease this. There is typically no IHT payable on pension death benefits provided the contributions weren’t made when they were in ill health. Extracting the cash from the business in the form of a pension contribution could result in an immediate reduction in the business owner’s estate.

Capital Gains Tax
Holding excess cash in the business could cause similar issues when shares in the company are sold. Entrepreneurs’ relief is valuable to business owners as it can reduce the rate of CGT payable on the disposal of qualifying shareholdings to just 10%. To qualify the shares must be in a trading a company. A trading company for this purpose is one which does not include substantial non-trading activities.

While cash reserves are not looked at in isolation, holding substantial cash and other investments could contribute to a company losing its ‘trading’ status. And unlike BPR, entrepreneurs relief is all or nothing. If cash and investments trigger a loss in relief it affects the full value of the business disposed of; not just the non-trading assets.

CGT will not be an issue if they intend to pass their shares on death to other family members. But it could have huge implications for business owners approaching retirement and planning to sell their business as part of their exit strategy. Extracting surplus cash through pension planning to ensure entrepreneurs’ relief is secured on sale of the business will be an important consideration.

The cost of delay
Each year clients delay, the maximum amount they can pay using carry-forward will diminish. The annual allowance cut from £50,000 to £40,000 in 2014/15 will reduce the amount that can be carried forward by £10,000 for each of the next 3 years. By 2017/18 the maximum carry-forward will have dropped from £190k to £160k.

What difference could this make to your retirement pot? Well, if your planned retirement was in 10 years, a net annual growth rate of 4% after charges on £190k would provide a pot of over £281K. By contrast, waiting three years and investing £160k, the accumulated pot would be £210k – almost £71k less.

Time to act
With the main rate of corporation tax set to fall by 1% from 1 April it makes sense to bring forward pension funding to maximise relief. Paying contributions in the current accounting period will see a reduction in the profits chargeable at a higher rate of corporation tax.

All in all, there are many compelling reasons to use pensions to extract profits which aren’t required for future business use. And the longer they leave it the greater the danger of missing out on valuable reliefs.

10 good reasons to pay into a pension before April

There are less than three months to go before the new pension freedom becomes reality. With the legislation now in place, the run up to April is time to start planning in earnest to ensure you make the most of your pension savings.

To help, here are 10 reasons why you may wish to boost your pension pots before the tax year end.

1. Immediate access to savings for the over 55s

The new flexibility from April will mean that those over 55 will have the same access to their pension savings as they do to any other investments. And with the combination of tax relief and tax free cash, pensions will outperform ISAs on a like for like basis for the vast majority of savers. So people at or over this age should consider maximising their pension contributions ahead of saving through other investments.

2. Boost SIPP funds now before accessing the new flexibility

Anyone looking to take advantage of the new income flexibility may want to consider boosting their fund before April. Anyone accessing the new flexibility from the 6 April will find their annual allowance slashed to £10,000.
But remember that the reduced £10,000 annual allowance only applies for those who have accessed the new flexibility. Anyone in capped drawdown before April, or who only takes their tax free cash after April, will retain a £40,000 annual allowance.

3. IHT sheltering

The new death benefit rules will make pensions an extremely tax efficient way of passing on wealth to family members – there’s typically no IHT payable and the possibility of passing on funds to any family members free of tax for deaths before age 75.
You may want to consider moving savings which would otherwise be subject to IHT into your pension to shelter funds from IHT and benefit from tax free investment returns. And provided you are not in serious ill-health at the time, any savings will be immediately outside your estate, with no need to wait 7 years to be free of IHT.

4. Get personal tax relief at top rates

For those who are higher or additional rate tax payers this year, but are uncertain of their income levels next year, a pension contribution now will secure tax relief at their higher marginal rates.

Typically, this may affect employees whose remuneration fluctuates with profit related bonuses, or self-employed individuals who have perhaps had a good year this year, but aren’t confident of repeating it in the next. Flexing the carry forward and PIP rules* gives scope for some to pay up to £230,000 tax efficiently in 2014/15.
For example, an additional rate taxpayer this year, who feared their income may dip to below £150,000 next year, could potentially save up to an extra £5,000 on their tax bill if they had scope to pay £100,000 now.

* Contact me if you don’t know what this is.

5. Pay employer contributions before corporation tax relief drops further

Corporation tax rates are set to fall to 20% in 2015. Companies may want to consider bringing forward pension funding plans to benefit from tax relief at the higher rate. Payments should be made before the end of the current business year, while rates are at their highest. For the current financial year, the main rate is 21%. This drops to 20% for the financial year starting 1st April 2015.

6. Don’t miss out on £50,000 allowances from 2011/12 & 2012/13

Carry forward for 2011/12 & 2012/13 will still be based on a £50,000 allowance. But as each year passes, the £40,000 allowance dilutes what can be paid. Up to £190,000 can be paid to pensions for this tax year without triggering an annual allowance tax charge. By 2017/18, this will drop to £160,000 – if the allowance stays at £40,000. And don’t ignore the risk of further cuts.

7. Use next year’s allowance now

Some may be willing and able to pay more than their 2014/15 allowance in the current tax year – even after using up all their unused allowance from the three carry forward years. To achieve this, they can maximise payments against their 2014/15 annual allowance, close their 14/15 PIP early, and pay an extra £40,000 in this tax year (in respect of the 2015/16 PIP). This might be good advice for a individuals with particularly high income for 2014/15 who want to make the biggest contribution they can with 45% tax relief. Or perhaps the payment could come from a company who has had a particularly good year and wants to reward directors and senior employees, reducing their corporation tax bill.

8. Recover personal allowances

Pension contributions reduce an individual’s taxable income. So they’re a great way to reinstate the personal allowance. For a higher rate taxpayer with taxable income of between £100,000 and £120,000, an individual contribution that reduces taxable income to £100,000 would achieve an effective rate of tax relief at 60%. For higher incomes, or larger contributions, the effective rate will fall somewhere between 40% and 60%.

9. Avoid the child benefit tax charge

An individual pension contribution can ensure that the value of child benefit is saved for the family, rather than being lost to the child benefit tax charge. And it might be as simple as redirecting existing pension saving from the lower earning partner to the other. The child benefit, worth £2,475 to a family with three kids, is cancelled out by the tax charge if the taxable income of the highest earner exceeds £60,000. There’s no tax charge if the highest earner has income of £50,000 or less. As a pension contribution reduces income for this purpose, the tax charge can be avoided. The combination of higher rate tax relief on the contribution plus the child benefit tax charge saved can lead to effective rates of tax relief as high as 64% for a family with three children.

10. Sacrifice bonus for employer pension contribution

March and April is typically the time of year when many companies pay annual bonuses. Sacrificing a bonus for an employer pension contribution before the tax year end can bring several positive outcomes.
The employer and employee NI savings made could be used to boost pension funding, giving more in the pension pot for every £1 lost from take-home pay. And the employee’s taxable income is reduced, potentially recovering personal allowance or avoiding the child benefit tax charge.

Changes to the UK State Pension

The Department for Work and Pensions has just launched a new campaign to explain the new single-tier state pension.

The new single-tier state pension, which will replace both the basic state pension and the state second pension (S2P) is now only 16 months away. While the focus of late has been on increased flexibility for private pensions, the state pension reform is in some respects more significant, if only because it will affect many more people.

The Department for Work & Pensions (DWP) has launched what it describes as a “new multi-channel advertising campaign” which it hopes will “ensure everyone knows what the State Pension changes mean for them.” That may be a tall order to judge from some research results which the DWP published alongside the press release announcing its new campaign. That research showed:
• 42% of people yet to retire admitted that they needed to find out more about saving for retirement;

• 38% conceded they “try to avoid thinking about” what will happen when they stop working;

• Only 60% of those surveyed realised it is possible to take action to increase their State Pension; and

• 37% of those aged 65 or over thought (wrongly) that the amount of their state pension will change as a result of the reforms. Although the DWP did not ask the obvious question, the chances are very few in that group were expecting a cut in payments after April 2016.

The DWP’s ministers “are urging everyone – and the over-55s in particular – to look at what the changes will mean for them and to secure a detailed State Pension statement so that everyone can plan accurately for retirement.” It is a recommendation we thoroughly agree with. However, be warned that if you have ever been a member of a contracted pension scheme you could well find that your projected state pension is less than “around £150 a week”, which is commonly quoted – even by the DWP in its press release.

Temporary Transfer Relaxation for pensions carrying higher tax free cash or early retirement age

Formerly pension scheme members with schemes carrying a higher entitlement to tax free cash or an early retirement age would loose these when transferring to a new plan, unless at least one other member of the same scheme transferred with them at the same time, to the same scheme. For schemes without any other members, such as section 32 plans, one person EPPs or assigned policies, this meant that the option to preserve protections when transferring to personal pensions was not available.

However, solo transfers are now permissible, as long as the following criteria are met:

• The transfer must fully extinguish all rights within the current plan
• The transfer must be made in a single transaction
• The transfer must be completed before 6 April 2015
• The new plan must be fully crystallised (including any other rights held within the new plan) before 6 October 2015
• Benefits are payable from age 55 (unless a protected retirement age is available).

As the transfer must be completed before 6 April, the investor would also have the choice to set up a capped drawdown arrangement, should they wish to retain the higher annual allowance. It should also be noted that any GMP benefits will be lost on transfer.

So what does this mean?

Pension scheme members who have held off transferring their benefits due to a potential loss of tax free cash or because they will loose the ability to retire early may now make an individual transfer to a new plan without loosing the enhanced benefits.

Who does this affect?

• Sports people and members of professions who were previously entitled to early retirement ages
• Members of occupational defined contribution pension schemes such as Executive Pensions, Small Self Administered Schemes (SSAS), Contracted Out and Contracted In Money Purchase Schemes (COMPs and CIMPS)
• Those who have transferred their benefits to a Section 32 Buy-Out

This is a complex area and advice from a pensions specialist should always be taken before implementing any transactions.

The press was full of ‘pension bank account’ stories in October. Will it be that simple?

The Taxation of Pensions Bill, which will put most of the Budget 2014 pension changes into law, was published in mid-October. It contained few surprises, not least because it had been issued in draft in August, along with detailed explanatory notes. Nevertheless, the Treasury pumped out a press release and the media duly splashed the (old) news.

The emphasis in the press coverage was, to quote the Treasury release “Under the new tax rules, individuals will have the flexibility of taking a series of lump sums from their pension fund, with 25% of each payment tax free and 75% taxed at their marginal rate, without having to enter into a drawdown policy.” It was this reform which prompted the talk of using pensions as bank accounts. However, things may not be quite that simple in practice:

• The new rules do not apply to final salary pension schemes, which may only provide a scheme pension and a pension commencement lump sum.

• It is already possible to make this type of 25% tax free/75% taxable withdrawal under the flexible drawdown provisions introduced in 2011. This has not proved very popular.

• The new rules are meant to come into effect on 6 April 2015, but they are not mandatory, so some pension providers may choose not to offer them. It seems likely that many occupational money purchase schemes will avoid any changes, as they were never designed to make payments out – that was the job of the annuity provider. Similarly many insurance companies may not be willing to offer flexibility on older generations of pension plan – just as some do not currently offer drawdown.

• The short timescale has been criticised by the pensions industry. Systems and administrative changes can only be finalised once the Bill has become law and that will be perilously close to April, making it difficult for providers to bring in the changes from day one.

• If you are able to take a large lump from your pension, the tax consequences could be most unwelcome. For example, drawing out £100,000 would mean adding £75,000 to your taxable income – enough to guarantee you pay at least some higher rate tax, regardless of your income, and quite possibly sufficient to mean the loss of all or part of your personal allowance. No wonder the Treasury expects to increase tax revenue as a result of the reforms.

• Ironically another of the pension reforms, reducing the tax on lump sum death benefits, could mean you are best advised to leave your pension untouched and draw monies from elsewhere.

The new pension tax regime will present many opportunities and pitfalls, not all of which are immediately apparent. Do make sure you ask for our advice before taking any action.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. The value of investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Tips to Maximise Your Retirement Savings

Use these best practices to build a secure retirement plan.

Saving Early.
By beginning your retirement saving at an early age, you allow more time for your money to grow. As gains each year build on the prior year’s, it’s important to understand the power of compounding and take advantage of the opportunity to help your money grow.

Set realistic goals.
Review your current situation and establish retirement expenses based on your needs.

Focus on Asset Allocation.
Build a portfolio with proper allocation of stocks and bonds, as it will have a huge impact on long-term goals.

For the best long-term growth, choose stocks.
Over long periods, stocks have the best chance of attracting high returns.

Don’t overweight a portfolio in bonds.
Even in retirement, do not move heavy into bonds. Many retirees tend to make this move for the income, however, in the long-term, inflation can eliminate the purchasing power of bond’s interest payments.

If in doubt, see a properly qualified independent financial adviser who can help you put together a plan to achieve your financial goals and implement the necessary arrangements to put it into effect.

Pension death benefits – you can take it or leave it!

Those looking to pass on their pension fund received a boost today when the Government confirmed they’re following through on their promise to scrap the current 55% tax charge on death. This means the tax system will no longer penalise those who draw sensibly on their pension fund, making pensions a very attractive wealth transfer wrapper.

What’s changing?
Your age at death will still determine how your pension death benefits are treated. The age 75 threshold remains, but with some very welcome amendments.

Death before 75
The pension fund can be taken tax free, at any time, whether in instalments, or as a one-off lump sum. This will apply to both crystallised and uncrystallised funds, which means those in drawdown will see their potential tax charge on death cut from 55% to zero overnight. Using the fund to provide beneficiaries with a sustainable stream of income allows it to potentially grow tax free, while remaining outside their estate for IHT.

Death after 75
DC Pension savers will be able to nominate who ‘inherits’ their remaining pension fund. This fund can then be taken under the new pension flexibility and will be taxed at the beneficiary’s marginal rate as they draw income from it. Alternatively, they’ll be able to take it as a lump sum less a 45% tax charge.

What does this mean for advice?

Funding
Taken with all the other pension changes coming in April 2015, this creates a genuine incentive to save, knowing that family members can benefit from the remaining fund. It means that a pension will become a family savings plan, enabling one generation to support the next.

Drawing an income
The current 55% tax charge on death acts as a penalty for scheme members who take a sustainable income from their pension pot. The only way to delay this charge is for a surviving dependant to continue taking an income from the fund.

The option of taking a lump sum is often overlooked in favour of postponing the tax charge until the dependant’s death.

The new rules will mean that beneficiaries other than dependants may now benefit from the remaining fund, without suffering a 55% penalty.

Death before age 75 offers the option of a tax free lump sum. But it also allows the fund to remain within the pension wrapper which the beneficiaries would have flexible access to. And nominating a loved one to take over the flexible pension pot will also be a popular choice when death occurs after this age.

These changes will standardise the death benefit treatment for the different flexible income options from next April. There won’t, for example, be any difference between taking phased flexi-drawdown or phased withdrawal, as crystallised and uncrystallised funds will be treated the same on death.

Making instructions known

It will become even more important that death benefit instructions mirror the scheme member’s wishes. A nomination or expression of wish will help to guide the scheme trustees in their decision making. You wouldn’t knowingly entrust what happens to your home or other assets on death to a stranger. If there are no instructions in place, you’re relying on the pension scheme trustees to second guess your intentions. And with such wholesale changes to the death benefit rules to come, advisers will need to revisit existing nominations at their next client reviews.

All eyes on 3rd December

It’s worth stressing that more detail is awaited, particularly on the operational elements of how the new rules will work in practice. The next step is to see the full details in the Autumn Statement on 3rd December. We’ll provide updates on the final pieces of the pensions reform jigsaw, as it all starts to slot into place. Watch this space.

Changes to Early Retirement Rules

On 6th April 2010 the minimum age at which you can access your pension benefits will increase from 50 to 55.

Both your employer’s pension schemes (past or present) and any individual pension plan’s you hold will be subject to the new rules. From 6th April 2010 therefore, you will not be able to access pension benefits unless you are at least age 55.

There are some very limited circumstances where retirement prior to age 55 will still be allowed after this date which are detailed below:

1. Some sportspeople/those in hazardous occupations or those who had a ‘contractual right’ to an early retirement age as at December 2003.

2. Those individuals who are in ill health can still apply to take benefits early and the scheme trustees will determine, following a medical report, whether it will be granted.

In the majority of cases, it is more worthwhile to leave your pension benefits to grow for as long as possible. However, if you need to access some or all of your pension benefits early, between the ages of 50 and 55 you should contact your financial adviser as soon as possible for further guidance.

For the avoidance of doubt, this could affect you if your date of birth is between 7th April 1955 and 5th April 1960.