We are now only a few weeks away from perhaps the most important financial year end for the pensions world.
As we have previously discussed, while there are undoubtedly many welcome changes, there are a few traps and time bombs that could catch some customers out.
The important thing to remember is that everybody who is in Drawdown now (even if you are not yet taking income) is in something called ‘Capped Drawdown’. This does not mean that you cannot take advantage of the new rules – far from it. However for some individuals it could be the case that it would be better to stick with your existing Capped Drawdown product.
This is likely to be the case if you are still contributing towards your pension. Those people who are in capped drawdown can still contribute up to £40,000 per annum (including tax relief) into their pension. Those who start their Drawdown after April and take an income; or pre-April customers who break the income limit rules, will have their maximum annual contribution allowance reduced to £10,000.
Customers who inadvertently break the rules could lose some tax efficiency in the future. Therefore before you take any income from your pension, please talk to us.
Remember any income you do take from your pension (after any Tax Free Lump Sum) is liable to income tax at your highest rate, even if you take it as a single lump sum.
With the new pension rules making pension saving attractive again, you may want to consider making a single lump sum contribution. It will receive immediate growth of 25% (being 20% tax relief) with further tax relief if you are a higher rate tax payer.
You will be able to take 25% of this amount as a Tax Free Lump Sum whenever you want. You can take the remaining 75% as you like in accordance with the new rules. The time when you take it could be important as you will pay tax on it, so you may wish to wait until you are on a lower income.
Until then, although not guaranteed, hopefully it will grow.
If you die before the age of 75 then whoever inherits it can take it all tax free !! If you die aged 75 or over, then whoever inherits it can either put it in a pension in their name with no tax deductions, or take it as a lump sum and pay tax at their marginal rate.
No matter how much is in your pension fund when you die, it will not form part of your estate for inheritance tax purposes.
Guarantee yourself Capped Drawdown before April
If you have not taken any benefits from your pension fund (Tax Free Cash or Income) then you are still governed by personal pension rules. If you take an income from your pension fund after April your annual contribution allowance would automatically be reduced to £10,000. If you crystallised a very small part of your pension before April, then you could qualify for Capped Drawdown and maintain a £40,000 annual contribution allowance if you stick within the rules.
For some customers this could be a valuable benefit.
This webpage has discussed current topics in a very simple format, if you would like more information on any aspect, please feel free to contact us. You can call us direct on 020 33 55 4827.