The changes to the pension rules introduced in 2015/2016 have been reported widely; the greater freedoms provide more flexibility on how pension benefits can be taken as well as the opportunity to pass retirement wealth on to younger generations either tax free or at a lower tax rate. The ability in certain circumstances to leave one’s pension pot to any person one chooses, free of inheritance tax (IHT), is a valuable way to maximise the benefit of these pension changes for family and beneficiaries.

We do not provide investment or financial advice but work closely with other advisers to ensure that a person’s estate planning compliments their pension arrangements and takes full advantage of the opportunities it offers.

A summary of the main pension changes is as follows:

Flexible access to pensions from age 55

Pension holders aged 55 or older now have more choice over how they take benefits from their pension. Flexi-access drawdown (FAD) has replaced capped drawdown and, at any time from a client’s minimum retirement date, they can choose to move all or some of their pension fund into an FAD.

A pension holder can choose to either:

  • continue to take a regular income via income drawdown or an annuity;
  • take smaller lump sums, as and when they like; or
  • withdraw the whole fund in one go.

The rules allow pension holders to mix and match, if they wish to. To take advantage of these changes, a pension holder must be a member of a defined contribution arrangement under a registered pension scheme.

Freedom over how pension holders take tax-free cash

Previously, pension holders who wanted to receive their pension as a lump sum could only take 25% of their pension fund tax-free. The remaining 75% had to either be placed in a drawdown account or used to buy an annuity; where any income taken out was taxed at their marginal rate.

Under the new rules, at any time from a person’s minimum retirement date onwards, they can choose to take lump sums directly from their pension fund. 25% of any amount taken is tax free cash and 75% taxed at their marginal rate. These are referred to as uncrystallised funds pension lump sums (UFPLS).

Freedom over whom you can leave your pension to

Pension holders now have full freedom to nominate who benefits from their pension fund when they die. Previously pension holders could only leave their pension to their spouse and dependants.

55% pension ‘death tax’ replaced

Under the old rules, it was only possible to pass a pension on as a tax-free lump sum if the pension holder died before age 75 and had not drawn from their pension. If they had drawn on it, or were aged over 75 when they died, the beneficiaries had to pay tax at a rate of 55% on the pension fund inherited.

Now, if a pension holder dies before age 75, the beneficiaries will be able to inherit any unused pension fund tax free, whether or not the pension has been drawn from. Broadly, a beneficiary has two years to take advantage of this tax exemption. If a person dies after age 75, beneficiaries will pay income tax at their marginal rate on any money they withdraw from the pension (these changes only apply to “income-drawdown” pension funds and “value protected” annuities).

Lifetime allowance

From April 2016, the lifetime allowance was reduced from £1.25 million to £1 million. Savings in excess of the new cap will be subject to a tax charge of up to 55% when benefits start to be taken.

How can we help?

We can work with a person’s financial adviser to structure their retirement wealth and to make provision for the next generation tax efficiently in a way that fits with their future plans and needs. This can involve ensuring that pension benefits are nominated for beneficiaries in the correct way, considering the benefit of trusts as recipients of death benefits, and drawing down value from other parts of a person’s estate to preserve what can be left in their pension to potentially pass free of IHT on their death.