Columnist

Don’t miss the pension opportunity

The new rules around pensions and ISAs this year give savers in the UK an opportunity that should not be overlooked. Chancellor George Osborne’s opening up of freedom of access for pension savers, as well as their beneficiaries, will give newfound flexibility which, coupled with the new opportunity to pass on ISAs still in their tax shelter to beneficiaries, is a windfall for many savers and their families. Getting the most out of these new rules will however require careful financial planning.

The much hailed abolition of the 55% ‘death tax’ is a political red herring as this was rarely ever paid, but has created the ability for pensions to be passed to the next generation like any other investment but without being subject to Inheritance Tax. This together with the freedom of access to funds for pension savers and their ultimate beneficiaries are changes to the system that need to be considered carefully in the context of retirement plans as well as family wealth planning.

From April, any money left in the pension pot of someone who dies before the age of 75 can be inherited tax-free. If somebody dies after reaching age 75, the funds can remain in a pension with no tax to pay, or be withdrawn by the beneficiary subject to his or her marginal rate of income tax.

The freedom around withdrawals may provide another source of money to meet a saver’s needs when they want it to. This puts pension fund ‘drawdown’ firmly in the mainstream against annuities and we expect that the pension product market will innovate to provide further opportunities for savers perhaps combining drawdown with annuities.

Individuals will still be able to take 25% tax-free as early as age 55, but rather than the remaining 75% being used to buy an annuity, it can be withdrawn and taxed at their marginal rate of income tax.

So if you are already taking your pension from an annuity or you are in a final salary scheme, then you are not affected by the new rules, but other pension savings arrangements could benefit from the new freedoms. Regardless of how big these other pension savings are, the new flexibility is likely to make a difference to you and means that careful financial planning is even more important than ever.

On subject of ISAs, the Chancellor announced in the Autumn Statement that when someone dies, their husband or wife will be able to inherit their ISA and keep its tax-free status. Previously the ISA shelter would disappear on death.

From 3 December, the date of the announcement, if an ISA saver in a marriage or civil partnership dies, their spouse will be able to transfer the value of the ISA and keep the tax advantages. Beneficiaries will stand to gain from the improved ability to pass on family wealth.

However, the key thing to remember with financial planning is careful, well considered thought, which takes into account your entire financial situation, is necessary before any action is taken. As in most circumstances, rushing into decisions can lead to living to regret them later.

We have heard the political exaggeration talking about savers withdrawing all their pension money, using it as a bank account, buying Lamborghinis or huge properties. However, we doubt investors will act irrationally or without thought with their savings. Neither will savers be able to withdraw their money as quickly as with a bank account.

As money can be withdrawn at 55, even if you’re a long way off retirement, in or close to it, making a realistic assessment of your current and future income needs should be completed and reviewed regularly. Again, this involves looking at your whole financial portfolio, as funding your retirement may now be better achieved by taking income from other investments rather than pensions, given that the pension can be passed onto beneficiaries free from Inheritance Tax.

Whether you’re saving for retirement or about to retire, current as well as future plans need to be reviewed. This means revisiting existing savings arrangements as well as any pension death benefit nominations, to ensure they meet your needs and objectives.

The level of choice created by the pension freedoms this year has been met with the approval the Chancellor envisioned, but more paths lead to the risk of a wrong turn being taken. This is why the government has created the promise of the ‘guidance guarantee’, which offers pension savers free impartial guidance at the point of retirement.

While this seems very noble, there is concern about whether it will be effective in many cases. The reality is that generic guidance is unlikely to suit most people- as their aims, needs and attitudes vary. Tailored, Independent Financial Advice to suit an individual’s particular circumstances can help them make more of their retirement.

After all, each individual will have different financial circumstances, which will need to be considered in the context of their goals and needs. Also, completely relying on the future rules being the same as the current ones would be misguided. While these pension reforms are the most radical for decades, we cannot be sure that the same rules will apply in years to come, which is why regular reviews are essential to financial planning.

The most important thing is that you shouldn’t ignore what the effects could be and thereby curtail the opportunity of any potential benefits. Simply thinking that you are unlikely to benefit from the new rules is not opening up the way to make the most of your retirement and family wealth preservation planning. To find out more about how the new pension rules affect you, please download our free eBook from www.Lowes.co.uk/pensions.

This was posted in Bdaily's Members' News section by Lowes Financial Management .