New Pension Flexibility – Freedom and Choice

19/03/2015

The Government had promised and has almost completed the process of fundamental pension reform, giving people much greater freedom over how they access or pass on their pension savings. Since 27th March 2014 the door has already opened for greater financial flexibility if you are over 60.  If your total pension savings are under £30,000 and /or you have up to 3 individual pension pots under £10,000 each, you can take these amounts as a cash lump sum. Note that normally the first 25% of the lump sum can be paid out tax free with the rest being taxed at your marginal income tax rates. Furthermore if you have a guaranteed income of £12,000 per annum including State Pension, you can drawdown your pension without restrictions and you can now take up to 25% more money out each year from a capped drawdown arrangement.

As from 6th April 2015 it is likely that everyone will be able to take out as much or as little from their private pension pot any time after age 55, so there will no longer be a requirement to buy an annuity. Again after a 25% tax free lump sum the remaining monies will be subject to income tax at the individual’s marginal rate as they are drawn. websters can provide the financial planning advice you need to help you decide what options are best for you. Although it may feel good to have cash you do need to think carefully about the risks and your longer terms needs particularly as many of us are living longer.  Also, why take cash from your pension that you don’t need now? Usually it will be better to leave funds invested in a tax free environment and just tap as and when needed.

The other fundamental change is that the pension death tax will be overhauled which provides considerable inheritance tax (IHT) planning opportunities for families. Prior to the changes pensions could usually be excluded from a person’s estate and not subject to IHT. However unused pension assets would be taxed at 55% on every £1 of pension inherited with no tax-free band as there is with IHT.

In very broad terms under the new regime, when someone dies under age 75, the recipients of their unspent pension cash will not be taxed at all. Where someone dies over 75 the recipients of the cash will no longer pay a 55% pensions death tax but instead will pay their own marginal rate of income tax on the pension cash they take as their inheritance.

This puts people inheriting the pension cash in the same position as if they had been the owner of the pension pot so you can take all the money in the form of regular sums or substantial one-off withdrawals, on the understanding that you pay income tax on the monies taken out at your highest marginal rate.

This alignment of the position of the original owner of the pension – for instance, the parent – with the position of the person who inherits the money – say their adult child or children – is hugely helpful. It means generations can plan together to share wealth and savings with less worry about IHT on monies accumulated in their estates.

websters can again provide the financial and tax planning advice you need to ensure that you and your family can plan and benefit from these new provisions. Please contact David Taine tained@tax.uk.com or Liz Hooley liz@tax.uk.com

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