Personal pensions have drifted into and out of fashion, since their introduction, usually at the caprice of our many different Chancellors of the Exchequer. Currently personal pensions are very popular, but they have positives and negatives associated with them.
Traditionally personal pensions offered some very valuable tax advantages for employees, employers and the self-employed to enjoy and include: Tax relief, at your highest rate, on contributions made to your policy. Your pension fund grows free from Income Tax and Capital Gains Tax 25 per cent of your pension fund, tax-free, when you take your benefits. Potentially tax free lump sum, on death, before benefits have been accessed.
But there were some drawbacks on pensions that made them considerably less popular than they are currently proving to be. The taxman insisted that, by age 75, you had to swap your pension fund for an annuity, and this could prove to be very poor value in the modern era of low interest rates. He also insisted that you take a minimum level of income from your pot (even if you didn’t need the money) and prevented you from taking ‘too much’ income (even if you did want the money). If you died, after taking benefits, but before buying an annuity, you could be subject to a 55 per cent tax charge.
Where are we now?
In his spring 2014 budget, George Osborne, the then Chancellor of the Exchequer, announced new Pension Freedoms, which have not only removed the negatives of personal pensions (noted above) but
have also opened up new planning opportunities for wealthy families.
Pension holders can now take their tax-free cash and take as much or as little pension as they like. There is no longer a requirement to buy an annuity with the pension at any age.
On death, before age 75, the pension fund can be passed onto any nominated person and it will be free from Inheritance Tax (IHT) and Income Tax – that person can decide whether to take the fund as a lump sum or to receive tax free income from the fund.
On death, after age 75, the pension fund can still be passed, free of IHT, to any nominated person. The lump sum, or income taken, will be subject to income tax at their marginal rate.
Furthermore, the recipient of the pension fund can nominate someone else to receive the money on their death, making this an inter-generational planning tool for wealthy individuals.
What do you need to do?
There are two pieces of action that should be undertaken by personal pension holders, to make sure they can take advantage of these rules:
Review your existing policy – just because the new rules allow you these freedoms, your pension policy may not allow them. If you want to use your pension for this type of planning, you may need to switch to a more modern policy.
Complete a nomination form – you need to actively nominate the person(s) you want to receive the benefit of your pension fund. If you fail to make the correct nomination, your pension company may not be able to offer the recipient the flexibility required. In the worse-case scenario, the funds may be paid to your estate and be subject to Inheritance Tax.
If you want to know more about the planning opportunities offered by pensions, or if you think a review of your existing pension is required, give us a call to arrange a no-cost, no-obligation meeting.
Risk warnings: The information contained in this article is provided for information purposes only. Before making any changes to your pension or investments we recommend you take advice from a suitably qualified professional. The tax benefits described in this article are correct at the time of going to print and these may be subject to change by HMRC. Tax treatment depends on individual circumstances and may be subject to change in the future. With investing your capital is at risk.