Year End Tax Planning: Pensions

Pension Freedoms

The popular pension freedom reforms that launched in April 2015 mean that people can now access their whole pension pot at age 55 (rising to 57 from 2028) and spend, save or invest the money as they wish.

The first 25% will be tax-free and the rest will be treated as taxable income and will be subject to income tax at their marginal income tax rate. Basic-rate tax payers need to be aware that any income drawn from their pension will be added to any other income received, which could result in them paying tax at 40% or even 45%. You can also choose to take your pension in smaller lump sums, spread over time, to help manage your tax liability.

Since April 2015, some restrictions have been removed. Fully flexible drawdown will offer considerable freedom, but highlights the need for expert planning advice. Existing capped drawdown arrangements will continue, although they are currently limited to 150% of a benchmark annuity rate. It should be noted that adopting these new flexibilities will restrict your future ability to invest more into your pension scheme, so care is necessary!

Transferring a Final Salary Scheme

If you have a final salary (e.g. Defined Benefit (DB)) pension fund, you may still be able to take advantage of the new rules to make unlimited withdrawals. However to do so, you would have to transfer some or all of your pension into a Defined Contribution scheme (DC or Money Purchase), there are a range of personal pension wrappers available. You should seek financial advice before transferring benefits, as you could lose valuable benefits which need to be weighed against the new flexibilities.

Your Pension Pot: A Tax Efficient Way of Keeping it in the Family

Important changes are also taking place with regards to how pensions are treated in the event of your death.

Retaining pension wealth within the pension fund and passing it to future generations is now an extremely tax efficient estate planning solution, as it combines inheritance tax (IHT) free inheritance with tax free investment returns and potential tax free withdrawals. Indeed, it may even change the way we utilise our capital in retirement, possibly leading us to spend other funds before our pensions.

You can nominate who inherits your pension fund. It can be anyone of any age and is no longer restricted to your ‘dependents’. If death occurs before age 75, the nominated beneficiary can access the funds tax free at any time. If the original policy holder dies after age 75, defined contribution pension funds can be taken in instalments or a lump sum and will be taxed at the beneficiary’s marginal rate.

Reviewing Your Retirement Plans

Clearly, it has never been more important to make the right choices about your pension fund, both about how you should carry on saving and how you should take the benefits.

These decisions will affect you for the rest of your life. It is essential, especially for those nearing retirement, to seek professional advice. Not only will an expert look at your pension fund, but they will consider your wider financial goals.

Read more in our Tax Planning Guide

If you require any further advice on pensions you can get in touch with our Wealth Management team on 01903 234094.