By Neville Pereira, Lubbock Fine Wealth Management LLP
In one of the most interesting election campaigns for decades who would have thought the final result would have entailed a majority for the incumbent Government. As we are now in fixed term parliaments, planning over the next five years becomes very important. There are some immediate actions clients should consider.
Pension freedom and choice has radically changed the face of saving. No longer are pensions just a means of providing a regular stream of retirement income - they can be used to fund any life event after the age of 55. However, the new pension freedoms and changes to the taxation of death benefits mean that, as things currently stand, pension benefits could be used to pass benefits that are Inheritance Tax (IHT)-free through the generations.
This advantageous situation has inevitably led to suggestions that people should consider paying contributions into pensions even when tax relief isn’t available (i.e. contributions exceed the individual’s relevant earnings and/or are paid after age 75). The idea is that even without receiving tax relief on the way in, the payments into pensions are immediately outside the person’s estate and in an IHT-free environment indefinitely. However, the previous Pensions Minister has said that 'we don't want pensions to become a vehicle for inheritance tax planning' and it is expected that the Government will come down heavily if this situation is being abused. In terms of other issues around paying contributions that are non-tax relievable, the following should be borne in mind:
- Annual allowance charge: contributions made before age 75, whether tax-relievable or not, are all assessed against the annual allowance currently £40,000 (2015/2016) and any excess contributions, subject to unused relief would be subject to an annual allowance charge (with the excess being added to income and taxed at 20%, 40% or 45% as applicable), unless the excess could be covered by using carry forward.
- Lifetime allowance charge: individuals may be provided with benefits up to any level under registered pension schemes, but where benefits exceed the level of an individual’s lifetime allowance currently £1,250,000 and to be reduced to £1,000,000 from April 2016 there are tax consequences (55% if the excess is withdrawn as a lump sum, or 25% if it is left within the pension wrapper or used for annuity purchase).
In terms of planning, clients should consider maximising their pension payments in order to obtain tax relief at their highest marginal rates. In addition, clients should be considering who they wish to benefit on death. Based on current rules, pension trustees comply with a standard pension death benefit nomination wording, if provided, which usually leaves a set percentage to beneficiaries, typically the spouse.
From the 5th April 2015, pension benefits can be left to anyone without any liability to IHT, with the ability for the receiving beneficiary (and subsequent beneficiaries thereafter) to have access to a pot of money.
The tax treatment of the inherited pot will depend on the age of the deceased pension pot holder. If death occurs before aged 75, beneficiaries can access the whole pot free of all taxes. If death occurs after aged 75, beneficiaries will be taxed at their marginal rates on withdrawals. In both cases, however, the lump sum death benefits will be paid free of IHT. Pensions are therefore now affectively a family trust in perpetuity.
What this means is that the letter of wishes/nomination form which the pension trustees must adhere to becomes an important and possibly critical part of financial planning, especially as tax rates, beneficiary tax status and the long term financial position of the beneficiaries will continually alter. As the funds in pensions are now IHT-free, clients should be revisiting the nomination of beneficiaries on all of their pension funds.
For further information on any of these issues, or to discuss how Lubbock Fine Wealth Management LLP could assist you with your own pensions and inheritance tax planning, please email me or call on 020 7490 7766.
Lubbock Fine Wealth Management LLP is an appointed representative of Financial Limited, which is authorised and regulated by the Financial Conduct Authority (FCA) No: 424497. Registered in England and Wales, Company Number: OC310826. Registered Address: Paternoster House, 65 St Paul's Churchyard, London EC4M 8AB.Some aspects of Inheritance Tax Planning are not regulated by the FCA.