Government’s announcement of pension changes which abolish the need to purchase a pensions annuity at age 75 give additional flexibility to those sorting their pensions planning, but also hide dangers that make pension advice critical in the coming months.
Thanks to the pension changes, many will appreciate the freedom to base their pensions planning on retaining their own pension savings, rather than cashing them in to buy a pensions annuity. They can now leave their pension savings invested, and as they have not handed their pension pot over to an annuity provider, they can leave what remains of their pensions savings to their children, in their will.
However, under existing legislation, this course of action could expose their pension savings to a combination of tax charges that could eat up to 82% of their funds, when they die. Over half of this consists of tax and other surcharges that would be levied on their savings as an ‘alternatively secured pension’. This is the term that refers to a pension held without an annuity purchase for those over 75, and for most is a continuation of their previous unsecured pension.
In many cases the alternatively secured pension will be an income drawdown contract, where pension savings are left invested in the stock market, and can be drawn down in different amounts each month, as required.
However, the remainder of the tax which could be due on pension savings left to the children as part of the saver’s pensions planning would be Inheritance Tax (IHT), which is levied by HMRC at 40% on any funds which exceed the individual’s ‘nil rate band’ allowance of £325,000 (or $650,000 for a couple).
While the nil rate band may sound relatively generous it includes all wealth contained in the individual’s estate, and many find their allowances quickly disappearing when they tot up the value of their property, life and other insurances, savings and investments, and the pension itself.
By taking pensions advice, portions of this tax liability and in particular the exposure to Inheritance Tax can be reduced, or eliminated altogether. Pensions savers can put in place an effective programme of pensions planning by working with a qualified independent financial adviser, in response to these and other Government pension changes that may emerge, over the coming weeks.
