Significant changes to the flexibility of pensions from 2015 mean that they now form a vital part of planning for any family business.
Flexible access to pensions from age 55
Most pension investors aged at least 55 now have total freedom over how they take an income or a lump sum from their pension. They can choose to:
a) Take the whole fund as cash in one go; 25% tax free and the rest taxed as income.
b) Take smaller lump sums as and when they like with 25% of each withdrawal tax free and the rest taxed as income.
c) Take up to 25% tax free and a regular taxable income from the rest (via income drawdown – where they draw directly from the pension fund, which remains invested – or via an annuity – where they receive a secure income for life).
Any withdrawals in excess of the tax-free amount will be taxed as income at their marginal rate. So, if you are a basic-rate (20%) taxpayer, any income you draw from your pension will be added to any other income you receive (e.g. your salary) and this could push you into the higher (40%) income tax bracket.
It is also possible to take the tax-free cash straightaway and the taxable income via income drawdown at a later date.
Who will be affected: Anybody with a defined contribution pension – e.g. individual or group personal or stakeholder pensions, Self Invested Personal Pensions (SIPPS), some Additional Voluntary Contribution (AVC) schemes, etc. – could benefit. Investors aged 55 or over in April 2015 should be able to take advantage of the increased flexibility straightaway.
Death Benefits: The pension never dies.
Pensions can now be left to any number of beneficiaries and they do not need to be related to you. The person who inherits your pension can in turn leave it to whomever they wish. In effect, the pension is an inter-generational savings plan. The tax treatment of the pension depends on the age of the holder when they die.
If you die before age 75: your beneficiaries can take the whole pension fund as a tax-free lump sum or draw an income from it, also tax free, by using income drawdown.
If you die after 75 your beneficiaries have three options:
a) Take the whole pension as cash in one go: the pension fund will be subject to 45% tax. However, it has been proposed this should be changed to the beneficiary’s or beneficiaries’ marginal rate of income tax from 2016/17.
b) Take a regular income through an annuity or income drawdown: the income will be subject to income tax at your beneficiary’s or beneficiaries’ marginal rate.
c) Take periodical lump sums through income drawdown: the lump-sum payments will be treated as income, so subject to income tax at your beneficiary’s or beneficiaries’ marginal rate.
Who will be affected: Anybody who has a defined contribution pension – e.g. individual or group personal or stakeholder pension, Self Invested Personal Pensions, Additional Voluntary Contribution schemes, etc. will be affected.
Transferring a defined benefit pension (e.g. final salary)
What is changing: Most people with a defined benefit (e.g. final salary) pension will be able to take advantage of the new rules and make unlimited withdrawals. To do so, they will have to transfer to a defined contribution pension (e.g. a SIPP). But as you could lose valuable benefits you will have to take appropriate advice first from an independent financial adviser.
Who will be affected: Anybody with a defined benefit pension wishing to take advantage of the increased flexibility after April 2015. It will no longer be possible to transfer from unfunded public sector pension schemes.
Summary
Pensions are the only investment products which will give you an instant minimum guaranteed return of 20% and let your investment grow tax free. The potential guaranteed return is up to 67%. Pensions can now be passed on free of Inheritance Tax and all other tax if death is before age 75. The majority of these tax benefits can in turn be passed to the inheritor(s).Pensions have now become the most efficient long term investment product in all financial planning.