New rules coming into force in April will change how pensions are used in retirement planning and inheritance tax planning. Pensions are an important part of long-term financial planning. The combination of tax relief on contributions and tax-efficient investment growth for the majority of investments held within pensions provide you with numerous benefits.The new rules introduce flexi-access drawdown, allowing you to take control of your income by being able to vary it at any time should their circumstances change.
You have greater flexibility when accessing income and capital as well as greater choice and lower tax when passing on unused funds. In addition, the new rules confirm that the traditional advantages of pensions, such as tax relief on contributions, will be retained.
Among the key changes is more flexibility in income withdrawal. Once you reach age 55, you will be able to take out any level of income and have no restriction on the frequency of withdrawals. You will continue to be able to take up to 25 per cent of their fund as a tax-free lump sum with additional income being taxed at your marginal rate. If you are already using flexible drawdown you will have the opportunity to contribute up to £10,000 per annum for the first time.
Usually, pension funds are held outside of your estate for inheritance tax purposes. Currently, a pension can only be paid out tax-free when death occurs before age 75 and benefits have not been taken from the fund. Otherwise a lump sum less 55 per cent tax or regular income less the dependant’s marginal rate, would be paid. From April 2015, should you die before reaching age 75, you can pass on their pension tax-free.
If you die after age 75, the pension is passed on free of tax but any capital or income withdrawals are subject to tax at the beneficiary’s marginal rate, or less 45 per cent should death occur in tax year 2015-16.
Additionally, the rules governing who can receive the pension are being relaxed, permitting anyone to be nominated as a beneficiary.
If you are concerned about the potential inheritance tax your estate might face, you will have the opportunity to decrease the value of your estate by transferring assets into your pensions.
Where death is likely to occur on or after age 75, careful planning can ensure the succession tax bill is minimised by including basic rate or non-taxpayers, such as grandchildren, as beneficiaries.
The same age-related tax position will apply when the beneficiary dies. Along with the pension funds they themselves have saved, they will be able to pass on inherited funds free from inheritance tax to their own beneficiaries, known as successors. This change represents the introduction of multigenerational tax planning, providing beneficiaries with opportunities to pass on any unused assets in a way that cannot be matched by any other mainstream investment vehicle.
The new rules enable a pension to become an increasingly versatile tool within an investment portfolio. They will provide tax relief on contributions, tax-free growth during accumulation, flexible income in retirement, and the opportunity to pass on assets to anyone tax efficiently. Using pensions in combination with alternative investment options will provide investors with a comprehensive and flexible long-term investment solution.