With greater access to pensions comes greater responsibility

To those of us at the sharp end of the industry, it sometimes seems that pensions are the gift that keeps on giving, but perhaps you can have too much of a good thing. The past few months have seen the government, and its proxy quangos, refusing to cease issuing various pension announcements, following the significant changes set out in the Budget this year.

Some of the changes discussed in this article may make you think that I have suddenly become a tax specialist. Let me assure you, my dear readers, that this is far from the truth, and indeed, I still have to take my shoes and socks off to count to 20. However, the Budget changes mainly concern tax, and as tax affects pensions, it’s time to dive in.

Sports car splurge

Although certain relaxations were mentioned in the Budget (who can forget the infamous “Well, if you want to blow your pension on the Lamborghini, that’s fine” sentiment from Steve Webb, the pensions minister), it was only on 29 September that George Osborne put some flesh on the bones when saying: “People who have worked and saved all their lives will be able to pass on their hard earned pensions to their families tax free.”

A laudable aim perhaps, especially given the historical situation where the purchase of an annuity to secure pension income for life could mean that a significant pot of money used to purchase that annuity would be lost if, say, the pensioner died two days after taking out the policy. However, like everything else about pensions, death and taxes, life is never that simple and the ‘solution’ comes with its own complexities.

Below is a before and after flow chart that aims to explain the tax consequences for the old and new world.

In essence, your age at death will determine how your pension death benefits will be treated by HMRC. Just to be clear on some terminology – an uncrystallised benefit is one where no benefits have yet been taken. A crystallised benefit is one where the income (all or part) has been drawn down.

Therefore, if you die before the age of 75, the pension fund can be taken tax free at any time. This is an improvement on the current position, where on death a lump sum from a drawdown pension would have been taxed at 55 per cent, with the income taxed at the beneficiaries’ marginal income tax rate.

If you die after the age of 75, beneficiaries will only have to pay their marginal income tax rate when they draw on the income. Alternatively, when a lump sum is taken, a 45 per cent tax charge will be applied for a transitional period (April 2015 to April 2016) and then at the marginal rate of tax. The old ‘financial dependency’ rules are also swept away. Anyone can be a beneficiary in this brave new world. For those who nominated someone to receive their pension death benefit lump sums – now may be a good time to review those nominations.

A few notes of caution:

• These flexibilities only apply in relation to defined contribution pension schemes or individuals with a drawdown pension fund;

• The lifetime allowance on pension savings (currently £1.25m) still applies. The driver behind this policy appears to be to try to limit people’s inclination to blow all their savings on the Lamborghini (other fast Italian sports cars are available) and fall back on the state to pay for their old age.

The reasoning behind the change is that if people feel they can leave more money to their families, they are less likely to spend it.

Sadly, this comes hot on the heels of research conducted by Hargreaves Lansdown, which means that more than 200,000 retirees plan to cash in their entire pension pots next year. A fifth will use it to pay for a holiday, 13 per cent will use it to pay off debts and 12 per cent to carry out DIY. This is perhaps not what the government wants to hear; neither is it a surprise to those of us with a more cynical turn of mind. More detail is likely to be revealed in the chancellor’s autumn statement, which is due tomorrow. Those hoping for an early Christmas present may be disappointed.

Giveaway guidance

In other news, readers may also be aware that an integral part of the relaxation provisions is that,
as Spiderman knows only too well, with greater power comes greater responsibility. In a pensions context, individuals will now have greater flexibility as to what they can do with their pension pots, but they will also need some help with their financial planning when they retire. The government has indicated that everyone will be entitled to some guidance at the point of retirement. Note that this is not individually tailored financial advice. It is basic financial information about the options that may be available out there in the market.

The government has announced who the favoured providers are, and it comes as no surprise to anyone that the Money Advice Service isn’t one of them. The Pensions Advisory Service and the Citizens Advice Bureau (CAB) will provide the bulk of the guidance.

Although it’s unlikely to be much more than a quick phone call, these volunteer organisations are going to have to boost their services to cope with the influx of work, and word on the street is that CAB volunteers in particular are not overly happy at the prospect.

In any event, as the Pensions Bill journeys through parliament, it was disclosed on 11 November that the guidance is in fact going to be provided by ‘paid experts’. Whatever the case, some extensive training is going to be required and it’s not yet completely clear just who is going to pay for said experts. Some things never change. SJ

Jennie Kreser is a partner and head of pension law practice at Silverman Sherliker