Pensions for inheritance tax planning
Posted by: Swindells FP, on February 16, 2015.
Earlier this year in our article ‘The Pensions revolution is coming‘ we informed you that from April 2015, pension savers will now have considerably more freedom and choice as to how they draw on their accumulated pension funds.
Continuing our update, the Taxation of Pensions Bill 2014 was given Royal Assent on 17 December 2014, meaning that it has now become an Act of Parliament. Recent amendments to the Bill, most notably the removal of the 55% tax charge on lump sum death benefits from April 2015, have significantly strengthened the opportunities afforded by SIPPS and Family Pension Trusts (Family SIPPs) as estate planning vehicles and have changed the landscape for inheritance tax planning advice.
There have always been good reasons to consider and advise on pension funding using such schemes, for example tax-free investment returns, tax relief on contributions and flexible benefit payment options, including some features with estate planning benefits, as scheme assets are held in trust outside the client’s estate.
The new rules bring greater tax-efficiencies, and estate and inheritance management opportunities. Rather than taking money out of the pension fund to be placed into an IHT mitigation arrangement, they will allow pension fund wealth to be retained within a pension arrangement for use by multiple generations of nominated beneficiaries, who can retain the fund until capital or income are required.
These new rules, announced in October, will allow members of a defined contribution scheme the ability to nominate an individual as a beneficiary (the beneficiary can be anyone at any age) to inherit the remaining fund as a ‘nominee’s flexi-access drawdown account’. The beneficiary is no longer restricted to being a member’s dependant , so adult children, or any other named beneficiary outside the family can benefit and they do not have to wait until they are 55 to have access to the funds. Additionally, the nominated beneficiary can themselves name a further successor to take over the drawdown pension fund on their death, where currently the only option is to pass on lump sum death benefits. This will allow the fund to continue accumulating wealth in a tax-efficient environment.
This opens up considerable pension planning solutions via pension schemes such as a Family SIPP where multiple members can join and, if they wish, pool their funds or assets. The members joining could be the chosen beneficiaries of the various members. By bringing members of an extended family, together under one scheme, it can be a tax- and cost-efficient way of building up retirement funds and offer a holistic approach to looking after the financial needs of both older and younger generations. The scheme allows up to 11 individuals to join. It is not restricted to just family members, but allows members to pool part or all of their funds together for selected joint investments they wish to secure.
To find out how the Pensions revolution effects you, please join our next Pensions Seminar on 19th March. More details and book here.
We wish to acknowledge Rowanmoor Group for content in this article.