Planes, trains & pension-mobiles
The new flexibility on how pension benefits can be taken, which come into effect from 6th April, is a great opportunity and, though I never thought I would say this, it brings a degree of excitement to pensions. Since the first details were announced in March and the subsequent tranches of further details made public thereafter, there has been a real buzz and pensions have amazingly become a hot topic in day to day conversations. But has the flexibility been oversold?
So what started me on this train of thought? During a taxi ride to the airport I had made the fatal error of responding to the driver’s question of what I did for a living. As soon as I mentioned pensions he was keen to seek clarification on how he could access his own pension. He had already planned out what he was going to spend the money on. Fortunately the conversation was all one way, he had a defined contribution scheme, he would ‘encash’ that, after all in the press that day he had read that it would be possible to access your pension at a cash point come April. The challenges ahead for those who will be providing flexible access drawdown from 6th April are massive. Tasks such as reviewing scheme rules, staff training, changes to processes and systems all have to be done in a very limited time. So though the basic functionality will be delivered on time the idea of accessing funds directly from a cashpoint will be a long time off, if ever. There may be a number of disappointed individuals on that front.
Where the new rules won’t disappoint, however, is in the ability to factor in passing money on.
From 6th April if someone takes benefits from their pension, and then dies before age 75, the individual(s) who inherits the pension fund will pay no tax on the benefits whether they take them as a lump sum or as an income from a retained pension fund in their name. Previously the major disadvantage in such a scenario was that it left the residual fund potentially liable to tax at 55% on the death of the pension member.
On the other hand, the downside under the new legislation is that if the member takes any pension income then they could be limiting themselves to tax relief on pension contributions each year of up to £10,000.
All the excited talk about pensions as bank accounts ignores one of the key advantages of a pension, the tax treatment. Taking money from a pension in tax terms may be the last thing you should do. As ever with these things what at first appears simple comes with a whole host of complex ramifications so professional advice should be sought before acting.