Are you making use of the 2015 Pensions reforms?
What are the current options?
It’s now possible for anyone to be nominated to inherit pension funds – not just ‘dependants’. For example, inherited Self-Invested Personal Pension Schemes (SIPPs) allow pension wealth to pass to anyone, including a non-married partner, and remain within the pension wrapper, available to them as and when they need it, rather than it being paid as a lump sum. And there’s no requirement for them to wait until they reach age 55 to access it.
The landscape of pensions has changed in that clients are no longer using their pension as the primary source of income in retirement, ear-marking the pension as the legacy for future generations. They are instead spending their non-pension savings for income. This means that the pension pot remaining on death is potentially higher, having only been accessed once other savings have been spent.
Accessing savings in this order means non-pension savings (such as ISAs, investment funds and bonds) are used to provide an income, reducing the amount of savings that may be subject to Inheritance Tax (IHT). This often leads to improved tax efficiency during the pension holder’s lifetime, because it may well be possible to receive an income that suffers less income tax than that which would have been provided by the pension. At the same time, pension funds – which are IHT free – are preserved. And they could also be paying less tax on their retirement income by best use of the tax allowances on offer.
In summary, the benefits from your SIPP/Private Pension pass free of IHT to the next generation or to a non-married partner, in contrast to most assets within the estate.
Does your pension contract allow the full flexibility that is now available?
A key consideration when discussing options with my clients is that not all pensions schemes can offer the full range of death benefit options. Some schemes have not adopted the full flexibilities, or don’t have the systems in place to offer them. For example, some older schemes cannot offer inherited drawdown, and the only income option for someone dying in such a scheme may be an annuity. Another option may be ‘return of fund’, which may not provide the client with the right outcome. This could mean a transfer to a more modern pension vehicle will be necessary to ensure my client’s future wishes are met.
When is the right time to nominate?
As nominations can be changed at any time, I don’t think there is such a thing as a ‘right time’. There are many aspects I consider with my clients to ensure that planning pension flexibility isn’t until close to retirement. I want to make sure that my clients and their loved ones are catered for in any circumstance – including the worst-case-scenarios, such as premature death.
Changes in personal circumstances, how much the client’s spouse may need in retirement, or reaching age 75 may all prompt a rethink on how benefits are to be distributed.
