Following radical changes to the pension rules on April 6, investors may need to do some serious tax planning or re-arrangement of their finances, warranting a serious discussion with a wealth manager.
Angela Murfitt, a chartered financial planner at Fairstone Financial Management, says: “People should be asking their wealth manager to explain the whole position from the ‘here and now’ to the question of ‘what happens in the end?’.”
In addition to the option of buying an annuity anyone aged 55 or over can take their pension in three ways:
● One lump sum, with 25 per cent tax-free and the balance taxed at your highest marginal income tax rate
● Ad hoc lump sums
● Tax free cash and/or an income under the new Flexi Access Drawdown (FAD) rules.
But many investors will have other assets outside pensions, such as individual savings accounts (Isas), taxable investment accounts or buy-to-let property. Your wealth adviser should consider your portfolio as a whole, making sure that you can draw a retirement income as tax efficiently as possible.
Here are four key questions to ask:
What is the best way to take an income?
Before April 6, many people were advised to draw an income from their pension before touching other assets. However, Ms Murfitt says: “In the past it seemed sensible to spend ‘restricted assets’ such as pensions first in favour of preserving Isa pots to gain flexibility, keep control and reduce the risk of losing out if you died too soon. This argument has completely turned on its head.”
Charles Calkin, head of financial planning at James Hambro & Co, says: “For many people it is now better from an inheritance tax perspective to draw non-pension assets first. It all means that you need joined-up financial planning and wealth management thinking.”
What risks do I face in taking income?
Mr Calkin says: “You can do much more with pensions now than you could, but with that freedom comes risks. You need a wealth manager capable of delivering strong investment performance — with a good track record of preserving and enhancing wealth.
“People worried unnecessarily about living beyond their means risk living too far within them. Lifetime financial planning can make a big difference in helping you to enjoy your wealth, which has often been very hard earned.”
Steve Wood, a wealth adviser at Canaccord Genuity Wealth Management, says: “Taking a lump sum or income from your pension fund will reduce the amount you can contribute to pensions in the future to a maximum of £10,000 a year. If you are continuing in work and wish to make future sizeable pension contributions then discuss whether this is the most tax effective way of taking an income or whether other assets could be called upon.
“Any income taken in excess of the 25 per cent tax free amount is taxable, so discuss what is the most tax effective way of taking your pension benefits. Be particularly aware of how your income is taxed, as some clients have had to reclaim tax deductions from HMRC where their providers did not hold a tax coding.”
How will my pension be administered?
Mr Calkin says: “Most advisers will use a specialist external self-invested personal pension (Sipp) provider. It’s important to check whether they are equipped to cope with the new freedoms so you can enjoy their full benefit. That might also be an issue if you have old-style pension arrangements, so it is worth reviewing these.
“You should also seek reassurance that the Sipp provider has the scale and administrative expertise to ensure you are paid properly. The new flexibility is encouraging people to think of their pension like a bank account, but if you are taking your income gradually over time rather than as a lump sum, then it creates some administrative complexity. The Sipp provider will have to earmark the different pots, taking tax at source where necessary.”
How can I pass pension assets to my family?
Any pension policyholder dying before the age of 75 now has the option of passing their pension to a nominated beneficiary, either as a tax-free lump sum, or to their nominee’s pension fund, so that they will have access to a tax-free income for the rest of their lives.
After 75, the fund can be paid as a lump sum subject to a 45 per cent tax charge or the monies can be passed to a nominee’s pension with the income then taxed at the recipient’s marginal tax rate from April 2016, but at 45 per cent this present tax year.
Mr Wood says: “This is probably the most significant and popular change in the rules as previously the pension ‘death tax’ was 55 per cent for those who were in income drawdown or age 75 plus.”
Dion Lindskog, head of wealth structuring at RBC Wealth Management says: “The death benefit changes now mean that pensions are one of the best investments for long-term family wealth transfer. With the tax relief on the contributions and the tax-efficient growth, even relatively small contributions can turn into significant amounts that can be passed, tax efficiently, through to future generations.”
Mr Calkin says: “If you are thinking beyond your own lifetime, your pension pot may now have a different risk profile to your other assets. That means it will be managed differently — perhaps less cautiously.”
Moria O’Neill is the personal finance editor of Investors Chronicle
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