How do you really want to use your pension?

Posted by Malcolm Gibbs on
By now most people are aware that their pension pots have become more flexible. We all have more control over how much we take and when – we can even withdraw the entire amount if we want to.

Assuming that most of us won’t take up former Pensions Minister Steve Webb’s suggestion of blowing our pensions on Lamborghinis, then for increasing numbers of people a significant part of their wealth will be in their pensions.

Because these funds do not generally attract Inheritance Tax or even pass under a person’s will, it is possible for them to be overlooked in succession planning on death.

Proper succession planning however cannot be undertaken without a review of the whole of a person’s assets including their pensions funds along with their objectives for later life, intended beneficiaries and the tax position.

All this has arisen since the Taxation of Pensions Act 2014 came into force making three key changes:

  • The potential to withdraw the whole pension fund, not just 25%, in your lifetime
  • Any part of the fund not withdrawn may be paid out on death to anyone you choose – they no longer need to be your dependant
  • The fund can remain in its favourable pension tax environment for a further generation.  Your successor can in turn make a nomination.  That nominee can use it as their own pension, or they can also withdraw it tax-free.

Concentrating on points two and three – the potential to hold significant funds in a tax-free environment and then pass them on free of inheritance tax, presents valuable planning opportunities.

For example:

John and Susan are married and each of them has a child from a previous marriage. They try to keep their financial affairs separate.  John’s house is worth £700,000, he has £300,000 in investments and £500,000 in a pension fund.  Susan has her own property which she rents out.  John is nearing retirement and ultimately wishes his estate to pass to Albert and with minimum tax.

Given the new pension rules, John will draw down on his investments to fund his retirement, knowing he can fall back on his pension at any time.  This will reduce the inheritance tax on his death.

However, every opportunity carries risks.  If John omits to formally nominate his fund, it is likely to pass to Susan.  Instead of drawing a pension, she can now nominate John’s fund.  If she nominates the fund 50:50 to John’s son Albert and her daughter, both of them can cash in the fund tax-free at age 18.  How much of this did John want?  What if Susan remarries or cashes in the fund and spends it on the Lamborghini?

If these issues are a concern, particularly with larger pension funds, we would recommend a trust solution.  This involves drawing up a bespoke trust to receive your pension funds with your choice of trustees and beneficiaries, guided by your instructions in a letter of wishes.  The benefits are:

  • Long term protection of the pension fund and your beneficiaries
  • Decisions over how and when cash and income are released to future generations will be made by someone impartial you have chosen, not a pension administrator
  • Suitable for a second marriage situation with children from a first marriage
  • Deals with concerns about surviving spouse’s remarriage
  • Peace of mind

The trust solution does not benefit from all the tax benefits of the pension environment but most of the tax issues can be mitigated with good legal and financial advice.   We would recommend that anyone with a pension fund of more than £150,000 considers the options with appropriate experts alongside a review of their will, bringing peace of mind of knowing that the arrangements you want for your succession planning are all in place.


About the Author

Malcolm has extensive experience in a wide range of private client work for individuals, business owners and directors in their tax and estate planning, business succession, trusts and asset protection.

Malcolm Gibbs
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