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The latest batch of reforms to pensions, announced by George Osborne in his speech at the Conservative Party Conference, only added to the complexity and sheer range of options now available to individuals with pension funds, of whatever size.

Much of the media has latched onto the ability for an individual to now pass on their pension fund to whoever they wish, with no tax charge. Unfortunately, as so often is the case with changes to pension regulations, the devil is in the detail.

Beneficiaries can only inherit pension benefits ‘tax-free’ if the original pension policyholder dies before reaching the age of 75, which most now are not expected to do, with life expectancy in the UK now averaging 82 years of age for males and 86 for females.

Beneficiaries receiving pension funds in such cases will be subject to income tax at their highest marginal rate on any money taken. Whilst grand-children, especially those benefiting from smaller pension funds, may escape income tax on these inherited funds, most adult beneficiaries will pay tax at either 20% or 40%.

Higher earners could easily pay income tax at 45%, as well as at the ‘effective’ 60% rate applicable to earnings between £100,000 and £120,000 per annum.

Those wishing to liquidate a (larger) inherited pension fund in one go will suffer a one off 45% tax charge which, whilst lower than the current 55% tax charge, is hardly tax free.

Another danger in the new reforms is the risk of an individual being penalised by a so called ‘trigger event’. For example, any individual who ‘crystallises’ (takes) just £1 of income from a (money purchase) pension policy after 05 April 2015, will see their so called Annual Allowance (the maximum amount that either they and/or their employer can contribute into all pension schemes each year) reduce from £40,000 to £10,000, for ever.

In addition, the individual in question would lose the option to ‘carry forward’ any unused relief available from the preceding three tax years and both of these changes are irrevocable. This could cost an individual over £190,000 in tax relief or could cost an employer up to £85,000, current tax rates.

There is some good news however, amongst the small print, as follows.

  • There is now more reason that ever for business owners and professionals to consider using pension schemes as a savings vehicle for their expected retirement
  • Individuals aged 55 or over, after 05 April 2015, will no longer have restrictions on the level of pension income they can take each year
  • The ability to pass a fund of up to £1.25m to beneficiaries, IHT free, is very welcome
  • There will be no need, in future, to purchase an annuity with a pension fund
  • Beneficiaries of pension funds will be able to draw upon them, regardless of their age
  • Pension funds can be passed to anyone, including the grand-children, potentially tax free

The essential message from us however is that the sheer level of complexity which accompanies the new flexibility on pensions means that anyone over 50, considering making substantial pension contributions, or taking benefits from their existing pension schemes, especially from very small policies, must seek advice from a suitably qualified specialist pensions adviser, ideally one with the relevant G60 (or equivalent) qualification.

We believe that the detail of these changes, in particular the so called ‘trigger events’ will not necessarily be picked up by certain professional advisers, e.g. Accountants.

In addition, individuals who respond directly to communications received from insurance companies about ‘liquidating’ small pension pots, could irrevocably compromise their own position and hence taking specialist advice gives individuals the best chance of benefitting from these new changes, especially where that individual has multiple pension policies, including small pots.

For future information about the changes, or to benefit from a free of charge initial consultation, please contact Russell Haworth or Andrew Brown on 01823 286096.

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