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Act Now to Ensure Pension Protection
The March 2014 Budget saw the Chancellor announce a number of major pension changes, which will offer greater control over how you spend, save and invest your retirement pots from April 2015. In addition, his Autumn statement announced on 03 December 2014, confirmed the abolition of pension tax charges on death. This has now been approved by Royal Assent and puts pensions at the forefront of inheritance planning going forward.
 
Mike McAnulty, Director at Central Investment, one of Scotland's leading firms of Independent Financial Advisers, discusses the forthcoming changes and why you should act now to ensure your pensions are protected in the future.
 
The new rules have been introduced by the government, as part of the Chancellor George Osborne's major pensions overhaul, which will offer increased flexibility and the freedom to decide who inherits your pension, irrespective of what age you die. Once implemented, the changes are expected to save thousands of families over £150million each year.
 
Increased flexibility
 
The new rules are likely to make annuities look less attractive and whilst they provide a guaranteed income payable for either the rest of your life or a fixed number of years, they are viewed as not offering the best value for money. Instead, from the age of 55, you will be able to keep your pension invested and draw on it as needed, or even cash in the entire pot.
 
Moving forward and as a consequence of these changes, we are likely to see innovation in annuity design.
 
Prior to the changes, it was also only possible to pass a pension fund onto spouses and financially dependent children under the age of 23, if you were to die before the age of 75 and you had not taken any tax-free cash or income, however the fund would be subject to a hefty 55% tax charge.
 
From 6 April 2015, anyone below the age of 75 with a joint life annuity will be able to pass their pension onto a nominated beneficiary completely tax free on death, provided the money remains in a pension fund.
 
It won't matter if the pension has been crystallised, in other words no money has been taken from it, it can still be passed on tax free, as long as the person who dies is under 75 years of age.
 
You will now have the option to pass your pension onto someone who is not a family member. This could be someone who would be financially affected by your death, for instance someone who shares your home.
 
Your pension does not need to just be passed onto one person either, the changes allow you to split the pension up, and so each beneficiary receives a share of your fund. There will also be the option to leave some, or all, of your fund to charity.
 
Despite this increase in flexibility, the nominated beneficiary must be approved by your insurer, therefore it is important that you discuss any planned changes to your pension with your financial advisor and pension provider.
 
Exemptions to the rule
Unfortunately, the tax charge on pensions if the saver dies after the age of 75 has not been abolished, however the rate at which a lump sum is passed on has been reduced.
 
Under the new rules, if you die after the age of 75 or you die earlier and have not nominated a beneficiary within the previous two years of death, then the lump sum will be liable to a 45% tax charge once passed on.
 
There is the option available however for your beneficiaries to take the pension fund in two or more instalments, which is called flexi-access drawdown, and the sum will then be taxed at their marginal rate of tax, whereas taking it in one lump sum will attract 45% tax.
 
There is further good news planned for pensions. The government intends to make lump-sum payments subject to tax at the beneficiary's rate by April 2016, which is known as a marginal rate, opposed to the 45% flat rate. This will mean that if your beneficiary chooses to take the deceased's pension fund as an income, and not a lump sum, the income paid out will still be taxed at their marginal income tax rate.
 
It is worthwhile noting that the new changes will not apply to those who remain in Final Salary Schemes, which have typically been sold as the best value and most generous schemes.
 
We expect that this will encourage some savers to transfer out of their current schemes in order to comply with the new rules, and therefore be able to pass their savings onto their love ones. If you are considering changing pension schemes, you should speak to your financial advisor who will be able to advise the best options to suit your circumstance.
 
The effects
There is the concern that the reduction in tax charges on pensions will encourage individuals to draw down their funds sooner than originally planned. This could result in the fund running out prematurely and the saver being left short pocketed later in life.
 
Your financial adviser will be able to help you plan how much of your pension can be touched whilst ensuring it is protected for the future.
 
The changes are likely to encourage savers to take the maximum possible advantage of their pension contribution allowances, with the reassurance that they can now build up their pension fund and pass on any untouched savings to beneficiaries, tax free. As a result, we expect that millions more retirees will opt for a process known as drawdown, where their pensions remain invested while they take an income.
 
When drawdown has been chosen and the saver dies with their pension still invested, they can leave instructions with their pension provider for the remaining funds to be paid out as a lump to their nominated beneficiary. Until the changes are put into effect, this would incur a 55% tax charge.
 
The changes also apply to Value Protection annuities, which allow policy holders to pass on any pension savings left after death. Therefore, if someone dies three years into a pension scheme with a five-year guarantee, the remaining two years of guarantee will be treated in a more tax-friendly way.
 
Points to consider
To be eligible, HMRC requires the payment of tax free benefits to start within 2 years of death, therefore it could be possible for a beneficiary of someone who died recently to defer payment until after 6 April to benefit from the new rules.
 
To ensure that you have made the necessary choices to inherit your pension fund onto a beneficiary of your choice, it is imperative that you plan ahead by speaking to your financial advisor and pension provider as soon as possible. Your provider should allow you to nominate a beneficiary when you start paying into your pension or at any subsequent time. It should be possible to change the beneficiary easily, if your circumstances change.
 
Central Investment's expert financial planners can offer clients impartial advice on the changes to death pension benefits and recommend the most appropriate action to take to ensure you take advantage of the new flexible pension options.
This information is based on our current understanding of draft legislation, which is subject to check and dependant on further clarification and finalisation being issued by HMRC. Central Investment is authorised and regulated by the Financial Conduct Authority.
 
The March 2014 Budget saw the Chancellor announce a number of major pension changes, which will offer greater control over how you spend, save and invest your retirement pots from April 2015. In addition, his Autumn statement announced on 03 December 2014, confirmed the abolition of pension tax charges on death. This has now been approved by Royal Assent and puts pensions at the forefront of inheritance planning going forward.
Central Investment Services (Scotland) Ltd is Authorised and Regulated by the Financial Contact Authority. Registered in Scotland No SCO54118. Registered Address: 9-13 Albert Street, Aberdeen AB25 1XX

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