Name: Linda Gilbert
Company: Munro Partnership Ltd
Linda Gilbert is a Chartered Financial Planner and Director of Munro Partnership.
Email Linda with your financial queries and she will answer in following issues of BWS magazine.
Pension savings – keeping it in the family
Like so many questions in financial planning there is no right and wrong answer. Much depends on what I like to call our ‘age and stage’. With young adults, like my daughters, I tend to favour ISA savings. If I jump a generation and consider my friends, my response may be a little different. Accelerate a generation ahead and I find the response can be different again.
Sweeping changes to pension legislation mean your pension savings can now become family savings.
Pensions have always enjoyed favourable tax treatment however restrictions on drawing the benefits were perceived as a negative by some. This is about to change with pensions becoming more attractive for everyone. Under the new rules, pension members will be allowed to manage their own pension plans, judging what income they require in retirement and effectively opt to pass unused pension funds to future generations. As a result, pensions will continue to be a tax efficient savings plan for the pension member as well as now becoming a very effective means of passing unused funds to the family.
Historically pension savings were accumulated over a working lifetime and the benefits drawn in retirement as pension income replaced earnings. If you were one of the many who did not buy an annuity, you were likely to have unused pension funds which would either be passed on to the remaining spouse on death or suffer a tax charge if paid to another beneficiary.
The new rules will allow defined contribution 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 will no longer be restricted to the dependants of the pension scheme member. For example, adult children can now benefit and they won’t have to wait until 55 to access the funds.
The pension member’s age at date of death will determine the tax position. If the original member dies before age 75, the nominated beneficiary will receive a pot of money which they can access at any time completely tax free. If death occurs after age 75, any withdrawals from the inherited pension pot will be taxed at the beneficiary’s marginal rate. 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. This could see key changes in financial planning. In the past, pension members would strip out the funds from pension schemes leaving other assets to be passed on to family members. Under the new legislation we could see a u-turn in strategy for those clients whose primary concern is maximising what can be passed on.
The ability to pass on the pension fund does not stop with the first nominated beneficiary as they can then nominate their own successor who will take over the drawdown fund following their death. This has the potential to allow accumulated pension wealth to cascade down the generations, whilst continuing to enjoy the tax freedoms that the pension wrapper will provide. What does this mean for pension members? As a minimum, it means revisiting death benefit nominations in place for existing plans to ensure they continue to meet member objectives. Also, members could consider nominating a number of different beneficiaries and skipping a generation with some of the fund. The new rules will be confirmed in the Autumn Statement due on 3rd December and will apply to Defined Contribution pensions which include personal pension plans, SIPPs, stakeholder pensions and employer money purchase schemes. Final salary pension schemes are not included.
Make it a New Years’ resolution to review your pension savings in 2015.