Last week, I covered some of the reasons to stay enrolled in your pension scheme at work and on Monday the Chancellor announced further good news for pensions.
The 55 per cent tax charge on pension funds if death occurs after the age of 75 will now be abolished.
There has been much miss-reporting in the media of the changes that were announced and there is still a lot of small print to be decided before the legislation comes into force. The main change will result in the death benefits after age 75 being taxed at the marginal rate of the beneficiary. We don’t yet know for certain if the benefits can be split between many beneficiaries, such as non-taxpaying grandchildren, but this change does raise some interesting planning opportunities.
The very wealthy, who are trying to reduce inheritance tax that is levied at 40 per cent on estates worth more than £325,000 will now be able to use pensions as an estate planning tool beyond age 75. It has always been the case that by leaving pension benefits to an asset preservation trust, avoids inheritance tax if done before age 75. This change will allow up to £1.25 million per person to escape inheritance tax, on top of the £325,000 exemption.
Those people in final salary schemes may miss out on the option to pass the value of their pension on to future generations and we would expect to see an increase in enquiries from members of these schemes seeking advice on how to transfer out to a personal plan to take advantage of the new rules.
For many people, it will not be a good idea to leave a guaranteed final salary pension scheme. But for some, such as those who are unmarried and not in great health, who want to leave pension benefits to children or grandchildren, it will be worth considering the options carefully.
Those people who are already drawing pension benefits in the form of a drawdown scheme no longer need to try and take as much out of the pension pot as quickly as possible to avoid the punishing 55 per cent tax charge.
It is likely that we will see more money remaining in pensions for longer, as they will be the most tax-efficient place to store wealth in later years.
David Hill is a Chartered Financial Planner and Independent Investment Adviser at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814, email firstname.lastname@example.org or see www.hillsfinancialplanning.co.uk