There’s more to a healthy pension than having all the income options at your disposal. In a world where pensions become as accessible as bank accounts, it will be equally important that getting your hands on your money is simple and pain free.
Having income which is paid timely, with the appropriate tax deductions and necessary reporting to make your tax affairs as uncomplicated as possible, will reduce the administrative burden.
Most people have an idea of how their retirement looks, but many do not know how it will be achieved – how much it will cost – how much you need to save (you will have your own questions to add).
Our approach is to guide the process of discussion to provide you with clearer ideals and expectations that are relevant to your personal needs.
Sustainability
- We monitor the longevity of your proposed withdrawals.
- We track the performance required to meet your income needs.
- With many clients acquiring a number of different pensions throughout their working life, having a single view of the total pension holdings, investment strategy, costs and overall risks, will become vital.
Timing
- It’s easy to think that you have time on your side to get your pension 2015 ready.
- You may not need to access the new income flexibility for several years.
- But what if you die before taking benefits? You could be trapped in an outdated contract where the only options may be a lump sum or a dependent’s annuity.
- Your family could be missing out the ability to have an inherited drawdown pot from which they can access at any time.
Inheritance Tax Planning
- The latest amendments to the Taxation of Pensions Bill firmly position flexible pensions as the estate planning vehicle of choice.
- Tax relief on contributions without the seven year wait for them to be outside the estate and tax free investment returns were already good reasons to fund a pension.
- Now combine these with the new rules where a flexible pension, such as a SIPP, allows pension wealth to cascade down the generations within the pension wrapper and it creates a truly tax-efficient wealth management and inheritance plan with few peers.
All employers must offer, or automatically enrol staff into a Workplace Pension, even if they have just 1 member of staff
- We will work with employers and their staff to implement the right pension for their needs
- We will make sure the pension meets the correct standards and all necessary reporting to The Pensions Regulator is completed to avoid fines
- Where senior staff require bespoke pension planning, we will help the employer and employee create the right pathway
- Current Lifetime and Annual allowances have created acute tax issues. A large part of pension planning has to incorporate immediate and future tax-planning to avoid punitive bills
What about my old pensions?
Many of us have collected various pensions from previous jobs. What we do not realise, is like any other insurance policy, they can be switched;
- New style policies are often cheaper, with greater flexibility when contributing or withdrawing money
- Investment strategies should change, or at least, be reviewed regularly. Newer products may have better or wider investment options
- Easier access to information, valuations, changes to contributions via the internet is often better within more modern policies
Retaining pension wealth within the pension fund and passing it down to future generations is an extremely tax efficient estate planning solution. It combines IHT free inheritance with tax free investment returns and, potentially for some beneficiaries, tax free withdrawals.
- Pension Freedom rules will allow personal pension type scheme members to nominate an individual to inherit the remaining pension fund as a ‘nominee’s flexi-access drawdown account’
- This can be anyone at any age and is no longer restricted to your client’s ‘dependants’. Adult children who have long since flown the nest can now benefit and don’t have to wait until 55 to access it.
- If the original member dies after age 75, any withdrawals will be taxed at the beneficiary’s marginal rate
- If death occurs before age 75, the nominated beneficiary has a pot of money they can access at any time completely tax free. In either case, the funds are outside the beneficiary’s estate for IHT while they remain within the drawdown account and will continue to enjoy tax free growth.
- The previous wisdom of stripping out funds and gifting the surplus income to minimise the impact of the 55% tax charge has given way to retaining funds within the pension as a more tax efficient solution
And on it goes…..
- The nominated beneficiary can nominate their own successor who will take over the drawdown fund following their death – unlike the current rules where lump sum death benefits are the only option for non-dependents
- This will allow accumulated pension wealth to cascade down the generations, whilst continuing to enjoy the tax freedoms that the pension wrapper will provide.
- But this relies on the existing pension arrangement being able to offer the nominees’ and successors’ drawdown accounts
Tax rate determined by age at last death
- Each time a pension fund is inherited by a nominee or successor, the tax rate will be reset by the age at death of the last drawdown account holder.
- On death before 75, it’s worth considering skipping a generation with at least some of the pot to ensure a tax-free inheritance for the kids. With growing chances that at least one of a 65 year old couple will live to at least 80, routing all the wealth via the surviving spouse means it’s likely any subsequent inheritance to the kids will be taxable.
Bypass Trust – when you still might want one
- It’s worth remembering that each time a pension fund is inherited it’s the new owner that has control over the eventual destination of those funds. Not only can they nominate who benefits on their death but, under the new flexibility, they could withdraw the whole fund themselves leaving nothing left to pass on.
- This may be an issue where there are children from previous marriages or concerns about a beneficiary’s ability to manage their own financial affairs, either through a lack of capacity or their own reckless spending habits.