How can pensions ever be exciting?


Sep 24, 2015


Pensions Personal Finance

Does anyone remember what all the fuss was about when pension rules were changed on ‘A day’ back in 2006? Probably not.

Since then there have been further major changes, including a restriction on the amount that you could pay into your pension fund each year, plus a cap on the total funds that you could invest.

These amounts are now being reduced again from April 2016. In addition, the amount of tax relief available to those earning above £150,000 is also being restricted along a sliding scale, from a maximum of £40,000 to a minimum of £10,000.

All of this appears to be pretty bad news. So what is so exciting about the latest changes?

The Government has been trying to find ways to encourage pension savings, against a background of poor investment returns, the state of the economy and bad press. The latest plan to achieve this is by a major relaxation in the way we can manage our retirement funds.

In the past, those who had retired were required to buy an annuity at age 75. This was abolished in 2011, and the alternatives are now a range of ‘draw-down’ options including capped draw-down and flexible draw-down. The Government believes we can now be trusted to manage our pension funds responsibly, and not cash in all our money to buy a Lamborghini or a luxury yacht.

A question mark arises, mind you, over what happens to any funds left when we die. Death before age 75 is tax efficient, as there is no charge on these funds. However, if you die after age 75, you are currently faced with a tax charge of 45%. Importantly, from April 2016 this is proposed to be reduced to your marginal rate of income tax.

This pot of left-over money sits outside your estate for Inheritance Tax purposes and crucially, you can now nominate anyone as a potential beneficiary after your death, not just family members. It goes further. On the death of the person who inherits your pension, they can pass it on again at these new lower rates of tax. Everyone should therefore review their pensions to ensure these successors are identified.

This introduces the possibility of using pensions to pass on wealth to your family in a tax efficient way. This will need careful planning and it would be a good idea to involve your tax advisor to ensure it fits in with your other plans. As always, this is only a brief summary of the main points and there is much more that needs to be considered in detail.

The advice must surely be to make the most of these rules while you can, seeing as in the Summer Budget the Government announced the possibility of further reforms, maybe even withdrawing tax relief on contributions to make them more like ISAs. This has been suggested in order to make pensions simpler to understand, but it would also save the Government an awful lot of money.

In the future will anyone remember the 2014 and 2015 Budget changes that have now made pensions so exciting? I doubt it.