Death and (Pension Drawdown) Taxes

Further good news in relation to the above was confirmed in the recent Government’s response to the “Freedom of choice in pensions” consultation following the 2014 Budget. 

 

To give a little background, at present when people utilising pension drawdown (or those who are over 75, not in drawdown but have “uncrystallised” pensions) die, the residual “pot” is taxed at 55% - the only exception being when the fund is used to purchase an annuity for the spouse or the spouse carries on with income drawdown.

 

In their response to the consultation, unsurprisingly, the Treasury has acknowledged that a rate of 55% might be “too high” and “needs to be changed”. This mirrors something that financial planners have felt since the rate was raised from the previous tax of 35%.  Interestingly, however, as this is a relatively complex and sensitive area, confirmation of the rate is not due until the Autumn statement, and will not take effect until 2015. 

 

Perhaps more interesting is the speculation within the industry (and within the adviser group at BROADSTONE) of what the new rate will be.  We haven’t got to the point of running a sweepstake, but popular opinions in the office include a parity with Inheritance Tax (40%), perhaps charging the pension fund to the individual pension holder’s marginal income tax rates or a return to the days of 35%.  The outlier is speculation that perhaps the Government will look to allowing wealth to truly span the generations, and maybe allow family members to effectively inherit the pension fund into their own pensions.

 

It will be fascinating to see the final detail of this in the Autumn statement (and see which of the office predictions were right).  One thing that everyone will be pleased about is that from next year 55% tax will no longer apply.

 

Duncan Wilson

Private Client Partner

 

Telephone: +44 (0)20 7893 3456

Email:  getintouch [@] broadstoneltd.co.uk

 

Pension Freedoms and the problem of youth

Whilst the vast majority of the UK populace has quite rightly been very happy with the changes and additional flexibility given to pension savers, a thought should be spared to some of the restrictions that will be placed on pension savers in the years to come.

Pension headlines have quite rightly been dominated with the good news of “accessing pensions from age 55”, “more flexible annuities to meet lifestyle”, “free guidance for all”, “changes to the 55% tax on death benefits” etc., what has seen little comment, however, is that from 2028, the age that savers can access their pension funds is rising from 55 to 57.  In addition, the recent government announcements have confirmed that from 2028, this age will be linked to being 10 years below the state pension age.  If the coalition’s proposals from 2013 to accelerate the state pension age are accepted, younger savers starting their careers today might not be able to access their state pension until age 70 and therefore their personal arrangements until age 60.  

Whilst it is very clear that The State cannot afford to pay pensions for an ageing population under the current rules, this linking of personal pension to state pension seems to be quite a contrast to the driving force behind the revolution in pensions we are seeing, and might be a reason for a future generation to tell us the we never had it so good (for once).

What is clear is that if early retirement is the goal, savers will need to make effective financial plans to give them the freedom to stop working when they desire.  This could and should include using other savings vehicles, such as NISAs in addition to their pensions so that they can bridge the gap between when they want to stop working and when they can access their pensions albeit in a far more flexible manner than has been available to them previously.

Duncan Wilson

Private Client Partner

Telephone: +44 (0)20 7893 3456

Email:  getintouch [@] broadstoneltd.co.uk

Future pensions innovations – it’s retirement income, but not as we know it

As highlighted in my previous blog, there has been a lot of comment regarding potential product innovation in the field of pensions and those savers reaching retirement.

 

What is clear is that while annuities are far from dead and buried, it is very unlikely that the traditional “one size fits all” annuity will be as prevalent, as the majority of people are likely to want their pension income to be able to adapt to their individual circumstance, health and their changing lifestyle in retirement. For example, it has been suggested that annuities could be designed to offer smaller payments initially while other sources of income continue and then increase later in life as Care is required. Similarly, many are considering the design of an annuity that could provide a higher level of income initially to suit additional costs of, say, holidays, family, homes, entertainment etc., and decrease later in life when one tends to stay at home, possibly increasing again when Care is required.

 

Along a similar vein, there could be certain annuity products that are specifically designed to consider payments for Care costs, which could address the coming social issue for which Government and individuals are not fully prepared.

 

A concept inspired by US pensioners is a pension income product you might purchase at retirement that doesn’t provide any income for, say 20 or 25 years, at which point the payments can be significantly accelerated. This could make both the early and later stages of retirement planning easier. A product like this could work extremely well with pension drawdown, which will still be available and work well for many when they reach retirement.

 

So, there are likely to be some very exciting changes in the world of retirement income options over the coming years. There remains the question of the cost of these solutions, especially in the formative years of these innovations when there is likely to be less competition. What is clear is that savers are likely to only benefit from the opportunities they bring if they take structured and impartial financial advice, and take the time with their financial planner to put the right solution in to place.

Duncan Wilson

Private Client Partner

Telephone: +44 (0)20 7893 3456

Email:  getintouch [@] broadstoneltd.co.uk