Have you considered passing on your pension to loved ones?
Cavendish Medical – Money Matters
After countless negative changes in recent years, saving into pensions has become popular again thanks to the so-called freedoms granted by the Chancellor last April.
At the same time, the pensions death tax was abolished, meaning pensions are also more attractive as an inheritance planning tool. With careful consideration, as well as providing tax benefits on contributions and a flexible income in retirement, pensions can now be used to pass on assets to future generations as part of an overall investment strategy.
Although pensions were exempt from inheritance tax (IHT) in the majority of cases, they were normally subject to a punitive tax charge – known as the pension death tax – at the rate of 55 per cent if the deceased had started to take income or had taken tax-free cash.
Now, when someone older than 75 dies, their heirs will pay income tax on any remaining pension at only their marginal rate and no tax charge will apply if they were aged under 75 (subject to them having available lifetime allowance remaining).
Previously, orthopaedic surgeons may have stripped funds out of their personal pension or SIPP in retirement but this new move will make it much more appealing to keep pension funds invested and to pass these on to family members in the future. Instead, you could choose to run down other assets such as ISAs first.
Crucially, your heirs can control the level of tax they pay by planning their withdrawals carefully. And the possibility of passing down accumulated pension wealth does not end after one generation. Your nominated beneficiary can choose their own successor provided their existing pension arrangement allows for drawdown accounts.
Remember that there can be financial disadvantages for taking pensions in the wrong order (e.g. accessing your private or NHS pension first) and penalties for contributing above set limits. In April 2016, the lifetime allowance will be reduced further to just £1 million, with harsh tax penalties (up to 55 per cent if taken as a lump sum) if you contribute above this limit to your pension savings.
Your number one priority should be to ensure you have enough assets to fund the type of lifestyle you desire in retirement. Your third age may last two or three decades so you will not want to exhaust funds before time nor leave so much to the next generation that you are unable to live fully now.
The content of this article is for information only and must not be considered as financial advice. Cavendish Medical always recommends that you seek independent financial advice before making any financial decisions.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The value of investments and the income from them can fluctuate and investors may get back less than the amount invested.
Simon Bruce is managing director of Cavendish Medical – specialist financial planners for senior medical professionals in the NHS or private practice. For a second opinion on your finances, please call 020 7636 7006.
