Keep It in the Family: Taxation of Pensions, Part 2

This article was originally published on Quadrant Group’s website. Quadrant Group was acquired by Progeny in March 2017.

While he may be known more for his light-hearted banter than political commentary, the former Strictly Come Dancing and Generation Game host Sir Bruce Forsyth caused quite a stir in the media last week when he revealed his frustration at the amount that will be taken from his estate in Inheritance Tax, describing it as “a bit over the top”.

Speaking to the Radio Times, Sir Bruce, who recently celebrated his 87th birthday, said “I think your inheritance should go to your children more than back to the country that you’ve lived in. I’m not saying you don’t owe the country something, of course you owe your country a lot for living there all those years. But I think it can be a bit over the top.”

His many decades of entertaining on stage and screen have earned Sir Bruce a considerable fortune. And with six children, nine grandchildren and three great-grandchildren, it’s no surprise he wants to be able to share as much of his wealth with them as possible.

You may agree that the current system is unfair and, like Sir Bruce, you may want to be able to keep as much of your wealth as possible in the family.

In the first part of my top ten tips for keeping your wealth within the family, I talked about the latest amendments to the Taxation of Pensions Bill and how they firmly position flexible pensions as the estate planning vehicle of choice.

Tax relief on contributions without the seven year wait for them to be outside your estate and tax free investment returns are already good reasons for people to fund pensions for oneself and family. These, along with the new rules where a flexible pension such as a SIPP or a Family SIPP, allow pension wealth to cascade down the generations within the pension wrapper provide a truly tax-efficient wealth management and inheritance plan with few peers.

Keep It in the Family – Part 1 covered the first three of my top ten tips. Below are the next advice points in this series.

4. Crystallised or Uncrystallised – what’s the difference?

A ‘crystallised’ pension is where the individual has taken the entire lump sum at payment upon commencement.

Previously, those concerned with passing on their pension wealth to future generations would delay crystallising benefits to avoid a potential 55% tax charge should they die before age 75. With positive changes to the tax law that simplify this decision, this is no longer necessary as both crystallised and uncrystallised pensions will have the same death benefit options and tax charges.

5. Testing against the Lifetime Allowance

Each time you draw benefits, your pension is tested against the ‘lifetime allowance’. Each person is allowed to have a pension worth £1,250,000. Any more and a tax charge is applied. It is essential that you review all your plans as soon as possible and check the values.

There’s no test where death benefits are paid after age 75 as these funds have already been tested. However, a new benefit crystallisation event is to be created to test uncrystallised funds which are taken as a dependant’s or nominee’s flexi-access drawdown against the deceased’s LTA prior to age 75. This test doesn’t apply where benefits are taken as an annuity or scheme pension. But this would mean the income becomes taxable and can only be paid to a dependant.

6. Two year unauthorised payment charge has gone

Get your pension death benefit house in order. Delays in death payments creates a tax charge.

Currently there’s a two year window to pay lump sum death benefits from uncrystallised funds without the payment triggering unauthorised payment tax charges of up to 70%. These tax charges will be removed from April 2015.

7. The New 2 Year Rule

As one 2 year rule goes, another one crops up in its place. Death benefits will only be tax free for deaths before age 75, if they distribute or the nominee flexi-access account is set up within two years of death.

Failure to designate the funds for drawdown within this two year window will see benefits taxable as income. Where funds are taxed as income they’re not also tested against the lifetime allowance. This could mean that those with funds in excess of the Lifetime Allowance (LTA) may want to weigh up the merits of delaying, to see if the tax charge for exceeding the LTA is greater than the potential income tax charge payable by the nominated beneficiary.

At Quadrant Group, we create life and financial plans that are reviewed each year and take great care to ensure that our wealth stewardship allows you to keep as much of your wealth as possible for loved ones.

Contact us to see how we can help you plan for your future.

Learn more next week about keeping your pension in the family in part three of this blog series. Subscribe to our newsletter to make sure you don’t miss it!

Free Download The Complete Guide to Inheritance Tax How to keep your wealth in the family Download Now

This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections.

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and the value of investments can fall as well as rise. No representation is made that the stated results will be replicated.

Andrew Pereira

Director, Wealth

Andrew has been working with families, high-net-worth clients and business owners for well over 20 years.

Learn more about Andrew Pereira