Pensions, Tax Reforms and Checking Out…

30 Mar 2016

A lot has been written about being able to take your personal pension (as distinct from company provided) from age 55 onwards and the unfortunate tax consequences, which ensue unless it is very carefully handled. Less is written about the wisdom of spending your pension early… Perhaps it is obvious.

This article addresses private pension death benefits as contrasted to company provided pension schemes. If you die while employed usually there is some multiple of salary paid to your heirs as compensation for there being no, or much less, of a pension that you would have received had you lived.

With a privately funded pension, recently there has been a major reform both tax wise and personally speaking. How long it will remain in force is moot, but it is here for now.

The term for it is a Defined Contribution Scheme, e.g., a Self Invested Pension Plan (SIPP). The deciding factor on good tax breaks is the age which you die and age 75 is the crucial number.

If you die before age 75 you can nominate any person or people you like to receive your whole pension pot 100% free of any tax at all, regardless of whether or not you have been in receipt of the pension or taken your 25% tax free lump sum. The nominees do not even have to be family members.

You may prefer they take the pension payments instead. That is fine and unlike you they will not be charged income tax on those payments, which is an anomaly. You may wish to do this to control where the capital sum goes as once it is taken out of the pension it can be spent or given away at will by your nominee.

If the fund remains in the pension the nominee can then nominate a successor recipient of their choice and keep the fund still tax free, depending on their age when they die. This is inter-generational pension transfer.

If you die over age 75 you may still nominate any recipient but capital released from the pension is taxed at 45% (currently) and pension payments taken are taxed on the recipient as they were with you.

There is potential here for a tax free pension fund to cascade down the generations whereas the rest of your assets attract Inheritance Tax. A fresh eye on the subject is required to take full and informed advantage of this golden opportunity. Tax advisors now have two separate funds to deal with on death.

1) The pension pot

2) The other assets of the individual

They must be looked at in conjunction.