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Pensions Wealth: Keeping it in the Family
The latest changes to pension rules, to be introduced in April 2015, open up a number of new opportunities for anyone interested in
inter-generational wealth planning; the efficient transfer of your assets to your children or other beneficiaries.
These amendments build on the additional flexibility in the ways that you can access pension funds for your own use, which I covered in the last issue of By the Dart.
The combined effect of all these changes is to remove a number of perceived drawbacks of pension saving, whilst retaining all the previous advantages.
Pensions as a Wealth Transfer Vehicle
Retaining pension wealth within a pension fund and passing it down to future generations will soon be an extremely tax efficient estate planning solution.
The new rules will allow members of defined contribution pension schemes to nominate individuals to inherit the remaining pension fund (assuming that this has not previously been used to purchase an annuity of course). This can be anyone at any age and is no longer restricted to your ‘dependants’. For example, your adult children can now benefit and don’t have to wait until 55 to access the funds.
Not only will any contributions to the pension have enjoyed tax relief and the fund enjoyed tax free returns, but any assets remaining on your death will now pass to your nominated beneficiaries with no inheritance tax.
If you die after age 75, any withdrawals will be taxed at the beneficiary’s marginal rate of income tax (which could of course be zero). But if death occurs before age 75, the nominated beneficiaries have a pot of money they can access at any time, completely tax free, provided that their ‘nominee flexi-access accounts’ are set up within two years.
Further Transfers
The ability to pass on pension assets doesn’t stop there. The nominated beneficiaries can in turn nominate their own successor(s) who will take over the pension fund following their death. This will allow wealth to cascade down through the generations, whilst continuing to enjoy the beneficial tax status that the pension ‘wrapper’ provides.
Taking Advice
This radical new legislation will undoubtedly have profound implications for retirement and estate planning. A number of questions immediately spring to mind:
- Are pensions now a more attractive savings vehicle than ISAs, particularly for the over-50s?
- Are pensions now a better option than more traditional Inheritance Tax planning strategies, such as gifting assets or trust-based solutions?
- Do your existing pension benefit nominations need to be re-visited in light of the new opportunities?
The answers to these questions will of course depend on your own particular circumstances and there are no clear-cut answers that will apply in every case. There are a number of important nuances in the legislation that are beyond the scope of this short article but which require careful consideration.
It is also worth noting that although the rules are changing, the Government is not forcing pension providers to offer all of the flexible options. You may find, particularly if you belong to an older scheme, that your choices are restricted. It may therefore be worth considering switching to an alternative scheme that supports your preferred solution.
For all these reasons it is probably advisable to review your existing pensions, investments and estate planning solutions in the light of the new opportunities and well-qualified, regulated financial advice is likely to be essential in this regard.
One thing is clear. After years of bad press, there are now very few reasons for not using pensions to make provision for a more prosperous future.
Pilot Financial Planning is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice.
For more information contact Ian Thomas 01803 839194 email: ian@pilotfinancialplanning.co.uk
First published By the Dart March 2015
