Not since I started in finance 15 years ago has there been so much good news for pensions and what it means to you! It has only been just over six months since the announcement that the need to buy an annuity was being removed and that you would be able to take as much money out of your pension as you wish. On Monday (29th September) came the news that pensions are to become even more flexible! I have highlighted the main changes and what it could mean in five quick points below:
- Removal of the 55% tax charge on death. Currently on death in you wish to pass your pension as a lump sum to your family HMRC will deduct 55% as a tax charge (it can only stay as a pension for children under 23 and spouses) . From 6th April 2015 this tax charge will be removed. This means it will be possible to pass your pension to your family (children, wife) without a 55% tax deduction if the pension is retained.
- Inherited pension funds will only be taxed at people’s marginal rate on the amount they draw out. So if a child needs help with the deposit for a house this will be taxable but likely at a much lower rate as it would be at the child’s marginal rate. This allows for fantastic intergenerational family financial planning.
- If money stays in the pension then there is no tax to pay. One of the biggest problems at the moment is lack of pension saving by younger people. This could help bridge some of the gap and provide some pension saving for your children with the fund they inherit.
- People will keep more money in their pensions for later life. One of the side effects of the previous budget pension announcement was the concern people would withdraw significant sums of money out of their pensions and buy a Ferrari and in doing so run out of money in later life because they have spent it all (a view I didn’t fully agree with). The changes announced today will give the people the confidence to keep the money in their pension for longer because of the tax advantages of being able to pass on to their family.
- Annuities will become even less popular albeit they will still form an important role in the retirement planning income mix for some. This announcement mainly affects those using an income drawdown contract and people buying a conventional annuity will not be affected by the new rule change.
A pension really has become a family intergenerational planning vehicle. Tax relief on the way in, grows free of income and capital gains tax, Inheritance tax free and the freedom to pass to your family tax free on death.
This week, has undoubtedly been a very exciting leap forward for pension investors who will now have greater flexibility and choice at retirement but this, inevitably will bring greater complexity. So there has never been a better time for individuals to work closely with a financial planner to make sense of this fast changing pension landscape to ensure they and their family maximise this new flexibility and enjoy a secure and comfortable retirement.