FLEXI ACCESS DRAWDOWN PENSIONS

Laurence Daly – Financial Planner – 11th June 2020

Chancellor George Osborne introduced pensions freedoms in 2015, allowing pension holders to access retirement funds flexibly. However, one benefit of the new freedoms that is frequently overlooked is the tax efficient way pension holders can now include pension savings in their estate planning, especially if their estate planning includes multiple generations or non-family members.

One of the reasons why these benefits might be overlooked by estate planning practitioners could be due to the positioning of pensions outside of an estate for IHT purposes.

 

Flexible access and the introduction of workplace pensions mean that many people are now funding their pensions at higher levels. In addition, ultra-low interest rates over the past decade have meant that many more people have taken advantage of high transfer values to move defined benefit pensions to their own defined contribution personal pension plan or Self Invested Personal Pension Plan (SIPP). This means that many more individuals, will have sizeable pension pots that won’t usually be dealt with under their Will.

If a personal pension or SIPP holder dies after the age of 75, their pension benefits’ income tax status changes. At this age, inherited pension benefits become taxable as income. However, if the holder dies before the age of 75, and the death benefits are paid out, or moved to a beneficiary’s Nominees or Dependents pension plan within two years of death, the benefit should be free from income tax. It is likely that most estate planning clients will live past 75, so the remainder of this blog is targeted to those individuals, and to highlight the benefits of flexi access drawdown.

Before the introduction of flexi-access drawdown pension benefits, any monies received by a beneficiary after the age of 75 would have been taxed at their marginal rate. If the fund is received as a pension lump sum, this is still the case, however it is now possible for a beneficiary to receive benefits in a drawdown pension. These funds can be kept within the tax efficiency of a pension wrapper, meaning that only income taken from the pension, is taxed at the beneficiary’s marginal rate. Pension wrappers help a great deal when it comes to passing on properties. It could be possible to pass on a commercial property easily, provided lifetime allowance considerations are met, maintaining rental income in a tax advantaged wrapper, and with only the withdrawn income taxed.

Historically, trusts (spousal by-pass trusts), were used to meet the wishes of pension holders who wanted to pass funds to children as opposed to spouses. Now, flexi-access drawdown allows the nomination of a beneficiary who can receive their benefits as an advantageous, inherited drawdown pension. A pension holder could for example nominate their grandchildren to receive funds who, despite not being dependants, would be eligible for them. They could use the pension as part of their own pension planning, or they could take income from it when needed, however the latter option would be taxed at a marginal rate if the death was after the age of 75.

The grandchildren’s pension pots would now be formed of an inherited pension, and their own accumulating pension, and they now have complete flexibility in access to their inherited pension, meaning they can tax plan accordingly. They could also take funds from the inherited portion at any time without triggering any money purchase annual allowance (MPAA). This would allow them to continue to fund their own pension savings as normal.

With all of these positives it’s important that practitioners address pensions when meeting estate planning clients, however there are things that must be considered:

Firstly, not all pension wrappers offer the flexibility outlined above so it’s important to understand what type of defined contribution pension the client has. Pensions are a complex area, so the help of a financial adviser is crucial to help examine any client’s pension structure. 

Secondly, the expression of wishes is now just as important as wills. If intergenerational estate planning is envisaged due to the flexibilities outlined above, the expression of wishes would need to include all nominees, ensuring they are able to inherit any benefits in the form of a drawdown pension. It should be noted, that not all pension administrators offer this facility, so again, a financial adviser could help ensure the pension is structured for the prepared estate planning.

This blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions and should be considered as guidance and not advice.  It is important for all individuals examining their pensions to seek expert financial advice from a regulated financial adviser.  Solicitors should be cautious when examining pensions with their clients as it is easy to stray into the area of regulated financial advice.  None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. 

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