Pension wealth and keeping it in the family

Changes to pension rules introduced in April 2015, opened up a number of opportunities for anyone wanting to explore family wealth planning and the transfer of your pension wealth to your children or other beneficiaries.

The amendments build on the added flexibility in the ways you can access pension funds for your own use.  The effect of all these changes is to remove a number of presumed drawbacks of pension saving, but still retaining all the advantages.

Pensions as a Wealth Transfer Vehicle

Keeping pension wealth within a pension fund and transferring it down to future generations will soon be a highly tax-efficient inheritance solution. New rules now allow members of defined contribution pension schemes to nominate individuals to inherit the remaining pension pot (assuming that this has not previously been used to purchase an annuity). This can be anyone at any age and is no longer restricted to ‘dependants’. For example, your adult children can now benefit and don’t have to wait until 55 to access the funds.

Although your contributions to your pension fund were tax-free and the returns your pension pot has enjoyed were also free of tax, any assets on your death will now pass to your beneficiaries with no inheritance tax. If you die after the age of 75, any withdrawals will be taxed at the beneficiary’s marginal rate of income tax (which could, of course, be zero). But if death occurs before 75, the nominated beneficiaries have a pot of money they can access at any time, completely tax-free, provided that their ‘nominee flexi-access accounts’ are set up within two years.

Further Transfers

The beneficiaries can, in turn, name their own successor(s) who will take over the pension fund following their death. This will allow wealth to cascade down through the generations while continuing to enjoy the favourable tax status that comes with the pension wrapper.

Taking Advice

This new legislation will undoubtedly have implications for retirement and estate planning. Until now, people assumed that their pensions and annuities died with them, but now there is a substantial pot of money that can be passed on to the family. A few questions spring to mind:

• Are pensions a more attractive savings vehicle than ISAs, particularly for the over-50s?
• Are pensions now the preferred option to more traditional Inheritance tax planning strategies, such as gifting assets or trust-based solutions?
• Do current pension benefit nominations need to be reviewed in light of the new opportunities?

The answers will, of course, depend on your own circumstances and there are no clear-cut answers that will apply in every case. There are a number of important implications that are beyond the scope of this article, but which require careful consideration.

It is worth noting the Government is not forcing pension providers to offer all of the flexible options. You may find, particularly if you belong to an older scheme, that your choices are restricted. It could, therefore, be worth switching to an alternative scheme that supports your preferred solution.

For these reasons it is advisable to review your current pensions, investments and estate planning against the backdrop of this new legislation and -regulated financial advice is likely to be essential.

However, after years of bad press, there are now very few reasons for not using pensions to make provision for a more prosperous future.

—

Ian Thomas is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice.

Article is accurate at date of writing.