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In the April 2014 Budget, the then Chancellor, George Osborne, unveiled ‘pension freedoms’ – which came into play in April 2015 – and was described as the most radical change to private pensions for many years, possibly since 1921 when tax relief on contributions came in.
In simple terms, anyone aged 55 or over could take the whole amount from their personal pension as a lump sum, generally paying no tax on the first 25% and the rest taxed at their marginal income tax rate.
The Government hailed this move as giving us ‘freedom and choice in pensions’. However, the initial headlines surrounding the announcement suggested that, on hitting 55, the majority of us would cash in our pensions and buy a fast car, become a property investor or head off on a Caribbean cruise…
According to the latest statistics from the HMRC, £16 billion has been flexibly withdrawn from pensions since April 2015. This seems like a large amount, but the average withdrawal per person in the last quarter of 2017 was a little over £7,500 – which hardly shows that people are ‘flashing the cash’. It seems as if people are more sensible than they were given credit for. Many are no doubt aware that we are living longer and are nervous about touching their pension pots, while other people are probably just confused about what pension freedoms actually mean for them.
At The Goodman Partnership, we’ve been working with our clients at retirement and pre-retirement to make the most of these new rules. In simple terms, ‘pension freedoms’ means benefits may be drawn from pension plans at any time after age 55 and you don’t have to retire from work in order to draw benefits. The two main methods of drawing benefits from accumulated pension funds are an annuity purchase or a flexi-access/income drawdown.
While the fact that people could draw down lump sums captured the headlines surrounding pension freedoms, there were other extremely important changes associated with this new legislation. These included changes regarding death benefit rules and we’ve seen this have a huge effect on inheritance tax planning and how our colleagues in the legal profession are writing Wills.
Since April 2015, you can now nominate whoever you like to receive your pension fund on your death. This would most likely be a member of your family but you could nominate someone unrelated to you if you wish, such as a friend, or even a charity.
Beneficiaries of your pension will sometimes have the choice of taking the fund as a lump sum or leaving the fund invested and using it to provide an income. But not all pensions are the same and some insurance companies have not aligned their pension products with the new flexible legislation. This means that some pension plans will not automatically allow the beneficiary to take advantage of flexi-access drawdown, income drawdown or Uncrystallised Funds Pension Lump Sum (UFPLS).
The tax treatment of the death benefits in the hands of the beneficiary will depend on the age of the policyholder at their death. This is a complex area of pensions that requires specialist knowledge in understanding what clients want to achieve for their families.
It is possible to have unlimited successors, so a pension fund could be passed on for generations if it has not already been spent.
We have built our reputation on advising people at or near retirement, so these pension changes have certainly seen our workload increase, as our clients come to us for advice. And that’s the important message here – as some options are set-in stone and not flexible, proper advice at this stage is key, as it helps people to weigh up their options and make the best decisions for their future.