Pension dilemmas often bring clients through wealth managers’ doors, but these invariably uncover other areas in need of investments and financial planning.
2015 has been hailed as the “Year of Pension Freedom”, since from the end of this tax year on 5 April savers will have unprecedented autonomy over how they use their retirement pots.
Individuals will be freed from the obligation to purchase an annuity for a large share of their money and instead will be at liberty to invest (or indeed spend) it however they see fit.
Of course, shrewd individuals with larger pots have commonly opted for flexible or capped drawdown, allowing them to take a certain amount of income from their pension while continuing to sweat the remainder by investing it. Under the new rules, those accessing their pensions through capped drawdown will still be limited as to how much income they can take annually, but crucially they will be able to make further contributions of up to £40,000 a year – possibly a very good strategy from a tax perspective.
What investors may not realise the full implications of, however, is that a significant increase of their withdrawals could trigger a move to flexible drawdown and a cut in the allowance to £10,000. Flexible access also closes the door on savers’ ability to use “carry forward” on unused allowances. But the real sting in the tail is that 75% of pension monies drawn each year could be subject to marginal rate income tax.
It will be all too easy to be nudged into paying additional rate tax on large withdrawals. The freedom to spend, spend, spend can come at a steep price if individuals aren’t keeping a keen eye on their annual income tax liabilities too and making sure they use all available allowances.
There are naturally a whole range of tax implications surrounding the pension freedom rules coming in on 6 April. We could, for example, see pensions becoming an important part of the financial planning armoury since Chancellor George Osborne removed the so-called 55% “death tax” on pension assets. While one might not exactly relish the thought, those who die before hitting 75 will be able to bequeath pensions free of tax and so keep a lot more of their wealth within the family and out of the Revenue’s clutches. (The pension assets of those making it past 75 will be taxed at the beneficiaries’ marginal rate, although no-one of course is advocating quite the level of financial planning required to mitigate this charge!)
And on this somewhat doleful note we are brought back to the heavy new responsibilities retirees will be taking on from this year: being now free to wring the maximum value out of their pension monies, it is up to investors to ensure that they do so – by investing intelligently and taking a holistic and objective view of their situation. While annuity rates may have been lacklustre, they at least offered a guaranteed income for life.
The hugely negative impact ill-judged investment choices could have on a retiree’s lifestyle is plain to see.
IHT mitigation strategies, alongside downsizing, making significant gifts to family members and setting up educational trusts for grandchildren are all topics our users are intensely interested in today. But they are also increasingly asking about investment strategies that are perfect for pension wrappers – the kind which aim to deliver attractive income levels alongside an element of capital growth, or which adjust their risk/return parameters in line with the individual’s advancing years and IHT liabilities.
There’s no denying that this kind of pension-specific wealth management can get a little complex. Yet it really is incumbent on the individual to fully explore all their options now – not least because there are likely to be significant gains to be had on several fronts.
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