New Pension Freedoms – how you can you use your pension fund to pass money to your children.

The new pension rules, which came into force in early April 2015, have received a great deal of attention in the last few months with the main focus being on people being able to access their funds in new and exciting ways. For example, the couple who have been in the news recently who have sold up and set off on a round-the-world voyage in a small boat…all on the strength of being able to access her pension fund!

However, there is another significant change that has been less publicised – the ability to pass a pension fund on to children or other beneficiaries i.e. intergenerational planning.

For some, a pension fund is now seen as a good way of passing wealth onto their children, rather than providing an income for themselves. Those who are able to live off other means, rather than their pension, could use the pension as a very tax efficient way of passing their wealth to their beneficiaries.

Broadly speaking the death benefit changes can be split into 3 categories:

  1. Death before the age of 75: Your pension fund can be passed on tax-free.
  2. Death after the age of 75: Your pension fund can be passed on but is taxable at a lower rate of 45% (rather than 55%), although there are ways to reduce this.
  3. On death the fund can be passed to an individual, a pension fund of an individual, a trust or a charity.

With the introduction of the new pensions freedoms a whole new world of flexibility has been opened up and we are already seeing a shift in terms of how pensions are perceived; from inflexible often maligned financial products to dynamic and exciting products offering a multitude of possibilities.

As a starting point anyone with an existing pension should review their death benefit nomination. Moving on from there, clients should consider whether their pension really is ‘their’ pension or something else entirely!

BLM offers a pension review service offering to review existing arrangements to optimise them for a client’s situation and ongoing requirements. To contact us click here.

There could be adverse consequences in taking or re-arranging your pension benefits and you should always seek advice from a suitably qualified and able financial adviser.

BLM Blogs are not meant, or designed, to offer personal advice; for advice in relation to your own situation, please contact us.

Can I cash all my pension in (and buy a Lamborghini)?

The biggest changes to pensions in a 100 years came into effect this week, on what is now being referred to as ‘Pension Freedom Day.’ If you have been following our series of blog posts on the 2015 pension reforms we hope you have found it useful so far. This week we’re focusing one big question that is on many people’s minds: Can I cash all my pension in (and buy a Lamborghini)?

In short, the answer is yes and, in case you’re interested, the reference to the Lamborghini was made by Pensions Minister Steve Webb who said that people could indeed choose to spend their entire pension pot on a sports car if they wished.

Having greater freedom over your pension fund brings with it greater responsibility. If you have other sources of income that can support your lifestyle throughout retirement then you may decide to cash in your pension fund and spend a lump sum. An important point to consider here is that only 25% of your pension will be tax-free – the rest is subject to tax at your marginal income-tax rate.

We would however urge caution; the DWP (Department for Work and Pensions) has said that for anyone applying for means-tested benefits they will be assessed on the basis that the pension exists, even if all the money has been spent. This could mean that people who spend the lot may not be entitled to housing benefit, jobseeker’s allowance or pension credit in the future.

There are a number of other options now available, including:

  • Draw from your pension fund gradually, taking a regular income or withdrawing money as and when you need it.
  • Buy an annuity which will provide a guaranteed lifetime income.
  • Leave your pension untouched and pass on to your children, grand-children or spouse when you die.

What is clear, is that it’s now more important than ever to seek advice before making decisions about your pension.

Our advisors are on hand to advice on your individual circumstances and our At Retirement services will guide you through the options available to you, so feel free to get in touch.

Keep an eye out for the next post in our series, which will consider how a pension can be used for intergenerational planning.

BLM Blogs are not meant, or designed, to offer personal advice; for advice in relation to your own situation, please contact us.

Who stands to benefit most from the changes to pensions?

Welcome to the second in our series of blog posts which aims to explain the upcoming pension reforms (due to come into effect April 2015) and the varied implications they might have. If you haven’t read our introduction to the 2015 pension changes yet, you can do so by following the link.

Up until recently people with Personal Pensions or Money Purchase Pensions reaching retirement age were faced with a decision of either taking an Annuity or leaving their money invested and taking income using a Drawdown type of arrangement. From April 2015 both methods will remain available but those not wanting to use either route can access the fund directly by taking a series of withdrawals.

Unlike an annuity, or a drawdown scheme whose income was capped, the new ways of accessing the pension fund will mean that people can make a conscious decision to run their fund down. For example, someone with a pension fund of £30,000 could opt to take £5,000 or thereabouts a year over 6 years thus fully exhausting the fund over that period. Some of this could be taken Tax free and some will be subject to Tax at the marginal rate.

It can be argued that those who have smaller pension funds will stand to gain the most, at least in the short term. The problem these people will have to overcome is the big question of ‘what happens after my pension fund runs out?’

Politicians seem to be suggesting that the new guaranteed minimum pension (to be introduced in the future) of around £148 per week will be enough for people to live on. But will it?

For those who seek to pass down their pension fund to their spouse, children or grand-children, the new rules will certainly help them achieve this goal but only when a suitable product is put into place.

From April 2015 the choices will be more varied. With choice comes complexity. With complexity comes risk; risk that the wrong decision could be made and in some cases this may be irreversible or at least costly.

For those seeking help and guidance with the options available to them when taking their pension, BLM’s ‘At Retirement’ service offers to guide clients through the options and complexities. Contact us for advice based on your individual circumstances.

The next post in our series of blogs about the 2015 pension changes will consider whether you can cash all your pension in (and buy a Lamborghini).

BLM Blogs are not meant, or designed, to offer personal advice; for advice in relation to your own situation, please contact us.

Changes to the rules that govern how you can take your pension

In April 2015, new pension rules come into force. These changes, based around the Chancellors budget of 2014, will have a wide ranging impact on many people taking money out of their pensions.

The rules affect those with a defined contribution pension; usually referred to as a Personal Pension Plan. The change of rules could also apply to those who have a funded defined benefit pension scheme but not those who have an unfunded scheme.

The changes to pensions have been hailed as being revolutionary; ground-breaking and even exciting!

There are so many changes and implications that it is impossible to cover them in one blog.

We therefore intend to issue a series of blogs and updates with each one dedicated to a particular strand of change to the rules. For example, we will look at

  • Who stands to benefit from the proposed pension changes of 2015
  • Can I cash all my pension in (and buy a Lamborghini)
  • How a pension can be used for intergenerational planning
  • How a pension can be made to provide a higher level of income than would have been available under the old rules and what impact this might have overall
  • Why making the right decision at the outset is so important and the dangers of making a wrong decision
  • How to be smart about accessing a pension to take maximum advantage of the 2015 changes
  • Why it is so important to check who is nominated as your beneficiary when you die
  • Why a pension may be a better proposition than an ISA.

Another strand to the changes is that everyone is now to be provided with free guidance on what their options are. Supplied primarily by the Citizens Advice Bureau and the Pensions Advisory service, those who are reaching their selected retirement age will be able to get guidance on what their options are. It is important to understand that guidance differs from advice. Advice is usually based on your own situation and requirements taking into account all the options available whereas guidance is more generic and not necessarily tailored to your own situation.

The need for advice has never been so great; a wrong decision could be costly and irreversible. There is more choice but also an added complexity to the whole situation and could lead to more questions than answers.

BLM will continue to offer its ‘pensions options at retirement’ advice service and expects high demand from existing and new clients faced with more options than ever before.

To sign up to receive our newsletter directly to your email, click here.

If you require advice rather than guidance, BLM can assist you by clicking here

Pensioner Bonds – what you need to know

In early 2015 Pensioner Bonds will be introduced as per the Chancellors promise in the budget of 2014. The exact release date is not yet known.

Savers have suffered from a dramatic fall in interest rates in recent years and the new bonds are an attempt to address this in some way, albeit only for those aged 65 or more.

There will be 2 variants available. One will offer a rate of 2.8% over a year and the other will offer 4% over a period of 3 years.

As ever, with anything that stands out as being a ‘good deal’, there will be a limit on how much can be saved. In this case there will be a maximum of £10,000 per person per term. This means that a maximum of £20,000 per person could be saved in the bonds over the 2 periods. The minimum investment will be £500

The interest on them will be Taxable at the savers normal rate of Income Tax.

The Bonds will be made available through the state-owned savings organisation, NS&I.

The Treasury, which estimates that the scheme will cost the Tax payer £325million, will issue up to £10billion worth of bonds and there is the likelihood that they will be fully subscribed within a matter of months.

Savers must be prepared to tie their money up for a period of 1 or 3 years. Early withdrawal will result in a penalty equivalent to 90 days interest.

Once launched they will be available by post, telephone or online direct from NS&I.

Although not available to everyone, and they won’t be suitable for everyone in the target group, they will help some people to achieve a much higher return than can be obtained using a typical Bank or Building Society account.

Taking your Pension – why the rules needed to change

In the most fundamental change to how people can access their pension in nearly a century, the Chancellor has announced a number of changes to the drawdown, trivial commutation and small pension fund limits. The intention is to provide more people with more flexibility to access their pension savings.

One of the most striking, and well publicised of the proposed changes, is that people will no longer ‘have to’ buy an annuity. For a considerable period of time annuities have been considered to offer poor value. Ironically, annuity rates (one of the measures by which they are judged to offer poor value) is by-and-large beyond the control of annuity providers. Annuity rates are typically driven by economic conditions and conditions over recent years have driven rates down. Quantitative Easing [QE] has been a major contributor to it and QE is not something that was dreamt up by the annuity providers; it’s a policy embarked on by the Bank of England at the behest of HM Government in order to try and get the economy moving.

Another key feature of an annuity is its inflexibility. This is something that has long been derided.

Remembering that the proposed changes are still in a consultation period, we hope that by relaxing the rules this unleashes the innovative potential of the annuity providers leading to products with more flexibility and better value.

We believe that annuities still have their place in retirement planning and the need for focussed in-depth financial advice will be even more essential should the proposed changes come into effect. There will be those people who will take their pension fund, spend the money, and worry about it later. For those who don’t spend it, and prefer to use it to supplement their income, there will be many decisions to be made. For example, where will they invest it; how much, if any, Tax will they pay on the income they receive from it, and will the money be at risk?

However, the main question is “when will the money run out?” Unless you know the date of your own death, this is impossible to answer; you will either end up with money left at the end OR you will run out of money. This is a daunting prospect for most.

Without doubt, whilst the consultation process takes its course, the area of ‘at retirement planning’ has just become even more complicated. We welcome change in this area and hope that the end result is positive for consumers and not just a cynical way of accessing higher amounts of Tax for HM Inland Revenue.

Only time will tell.