Pensions are the new Rock and Roll – well in the pensions world!

This week we welcome John Kelly from Mattioli Woods as a guest ‘Tax Biter’. Below is his commentary on the ground-breaking new pension rules:

John Kelly – Mattioli Woods

The new proposed changes to the flexibility of pension schemes have now been made even better, following the proposals for removing the 55% tax charge on the death benefits from the plan. This could lead to pension plans being one of the most tax efficient planning vehicles available!

In recent times although tax relief on contributions is available of up to 45% there were still concerns that those tax advantages would be removed on death with a 55% tax charge being applied if monies were passed on to your beneficiaries.

The proposed changes mean that with still up to 45% tax relief available on a contribution and the fact that investment returns are free of tax within the pension plan, the pension pot can be passed on to your children (for example) without any Inheritance or Income Tax (only if scheme member dies before the age of 75) paid on the proceeds. The planning applications of this to most people’s financial situation are endless. Some thoughts come to mind:

  • Your current tax bill could be reduced now with up to a £40,000 contribution being the annual contribution limit (there is also the possibility of using previous unused allowances).
  • Once the monies are in the pension scheme the value of the investment can increase tax free. Consider this compared to holding monies in a business or personally.
  • When you reach the age of 55 all of the money can be withdrawn or you can phase your benefits in line with your tax position on a yearly basis.
  • The monies that you do not require will be passed on to any beneficiary of your choosing either free of tax before the age of 75 or at the beneficiaries’ marginal rates after the age of 75. For instance children and grandchildren could use their personal allowance to draw monies out free of tax and this could ultimately help with the provision of tax efficient higher education funding or to provide funds to get on the property ladder.

One thing to bear in mind however is that this level of flexibility is only available to money purchase schemes. This includes personal pension plans, SIPP’s and Small Self-Administered Pension Schemes. It is not available on Final Salary pension schemes.

Both the proposed changes for pre age 75 and post 75 have gone further than we had anticipated.

The proposed changes mean that there is no better time to start looking at the level of income you need in retirement, what assets you may want to pass on to future generations and how tax can be minimised personally or in your company by making pension contributions. Care needs to be taken with any planning as there are specific parts of the legislation that are likely to be phased in until April 2016, namely the tax payable on a lump sum death benefits payment.

To illustrate the changes the following table provides a simple summary of the lump sum payment out of a defined contribution pension scheme on death:

Death Before Age 75 Current New Notes
Pre-Retirement Tax Free Tax Free
Post-Retirement 55% Tax Free
Death After Age 75 55% Income Tax Rates 45% until April 2016 according to initial   commentary

 

If you would like a review of the changes and how they fit in with your position now and in the future Mattioli Woods can offer an initial meeting at no cost to see if there are any issues to consider.

The full details of the proposed changes are still being looked at however Mattioli Woods have commented as follows:

“We have long advocated the personal ownership of pensions and the ability to move them from one generation to the next, which is both in the interest of members and the government. The opportunities for pension scheme members will be significant but it is clear that sound advice, as well as considered product selection, will be key.”

 

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