Keep It in the Family: Taxation of Pensions, Part 3

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

It used to be the case that pensions existed purely to provide an income in later life. But the new Taxation of Pensions Bill, which will take effect from April 2015, will make pension funds a new tax-efficient savings vehicle, something that will be particularly attractive to those with large savings. More than that, it will be possible to pass the pension pot on from generation to generation, just like the family silver.

So far in this series on ‘Keeping It in the Family’ (Part 1 and Part 2), I have given my top advice points aimed at family stewards who want to provide for the next generation and also support those in need today.

Below are the last of my tips in this series.

8. Reviewing Nominations

To get the most from your investments, nominate people or use ‘Pilot Trusts’ in your pensions as soon as possible and check what options are available with the provider.

The new death benefit rules have changed the dynamics for those looking to pass on any remaining pension fund on death. This means that you should revisit existing death benefit nominations to ensure they continue to meet your needs and objectives. You will have to check whether your existing scheme will even allow your preferred solution.

Under the new rules, the scheme administrator cannot nominate someone for nominee’s drawdown if there’s an existing dependant or an existing nomination in place.

9. Spousal Bypass Trust – when you still might want one

If you have a Spousal Bypass Trust in place, you may want to revisit this decision.

It’s worth remembering that each time a pension fund is inherited, the new owner has control over the eventual destination of those funds. Not only can they nominate who benefits on their death but, under the new flexibility, they could withdraw the whole fund themselves, leaving nothing left to pass on.

This may be an issue where there are children from previous marriages or concerns about a beneficiary’s ability to manage their own financial affairs, either through a lack of capacity, or their own reckless spending habits.

Where control is an issue, there are two potential solutions:

  • Nominate a split share of the pension fund, for example, 50% to the spouse with the remaining 50% split equally among the children. This gives all parties their own fund which they can manage themselves and when it’s gone, it’s gone.
  • Pay a lump sum death benefit to a Trust which will put the control into the hands of the member’s chosen trustees. The trustees can determine when and how much to distribute to beneficiaries. Choosing this option means only a lump sum can be paid to the trustees – there’s no option for them to be a drawdown holder.

10. Should I take my Tax Free Cash?

There’s no longer any reason to delay taking tax free cash, as it could be gifted and outside the Estate after seven years. But if the tax free cash remains in the Estate and suffers IHT at 40%, it may be better to leave the cash within the pension fund, if your beneficiary is able to draw on it at basic rate or less.

Currently, some people delay taking their tax free cash until 75 to escape the 55% tax charge on crystallised funds. But now the 55% tax charge has gone, there is equal treatment between uncrystallised and crystallised funds, when the pension is taken as a lump sum payment upon commencement.

As always, there’s no simple answer to the best way to manage your pensions and investments. But with the new changes being introduced, pensions are becoming much more flexible, both in terms of access, funding and taxation on death. To learn more about how the Taxation of Pensions Bill could benefit the stewardship of your wealth, please contact us at Quadrant Group.

Missed out on part 1 and 2 of this series? Read them here and here.

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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