Pension Freedom and Choice came into force on 6th April 2015. The way in which individuals could access their pension funds has been dramatically overhauled and as a SIPP & SSAS Provider, Taylor Patterson thought it would share its experience of the new regime so far.
Has there been a rush to withdraw money from pension schemes?
The headlines suggested that individuals would take all of their pension fund and buy a Lamborghini, however, the reality has been very different. Taylor Patterson, like many other SIPP & SSAS Providers, has not seen a rush on clients looking to withdraw the full amount of their pension schemes. In fact, we have witnessed very limited client requests to either increase their pension or to withdraw their entire fund since 6th April this year. In fact, the response and instructions that have been most frequently received from advisers or direct from clients are to either stop or reduce the pension income.
This is also combined frequently with the question as to whether these individuals can still contribute to their pension fund. This is due to the fact that the assets held in their personal estate would generally be subject to Inheritance Tax (IHT), whilst those monies held in the pension fund will typically not be subject to the tax.
A New Way of Thinking
This is leading to a whole new way of thinking for many members in assessing the tax efficiency of their personal and pension money. The decision has become whether to either spend personal assets over and above the pension fund, or possibly consider a combination approach, if they want to pass monies down the generations. Obviously, much depends on the advice that they receive from their professional advisers.
On death prior to age 75 the pension fund generally passes on tax-free to whomever the member has specified under the “Expression of Wish or Death Nomination Form” and the pension fund can be taken either as a lump sum or as income by the beneficiary (ies). Whenever this fund is withdrawn it always remains tax-free since the member themselves died pre 75. Whilst these funds remain within the pension fund they also still attract generally tax free growth.
However to look at the more realistic situation for death, (average age of death is approximately 83 men and 85 for women according to the Office of National Statistics*) of the member post 75, the pension assets again can be passed on to the named beneficiary (ies) and taken however they wish. However, this time the monies are taxed at that individual’s marginal rate of income tax, at the time they are withdrawn. It is generally possible within some families, with careful planning provided by their professional advisers, to transfer assets down to either basic rate or nil rate income taxpayers. Therefore, the income tax to be paid would be less than that due under inheritance tax (IHT) rules, which is currently 40%.
There has been a large uptake in clients completing/reviewing their Expression of Wish documents and we are strongly suggesting that clients look to complete these to provide guidance to the pension scheme trustees where they wish the funds to be paid. These forms can be updated at any time and can be amended as and when individual circumstances change. In view of the new rules it is not only essential that your pension provider is aware of your wishes on death but suggested that the member makes all concerned aware of their wishes, i.e. leave a copy of the Expression of Wish, with your will. This should minimise any potential disputes and administrative issues at the point at which the benefits are to be paid.
What can clients expect when they wish to access their pension funds?
The government under the new legislation has made the pension provider the second line of defence, for those members who have not sought independent advice and want to take or change their benefits above the current capped drawdown limits.
For example if a client approaches a pension provider, wanting to access their pension fund the pension provider must ask several questions. This is to establish that the member is aware of the risks of withdrawing their pension funds and are aware that they have access to free guidance via the Pension Wise website (www.pensionwise.gov.uk) as well as taking the decision to pay for financial advice.
If the member still wants to proceed without advice then the pension provider, will need to ask questions, regarding their risk, health, sustainability of income in retirement and tax implications to name a few!. Until the pension provider has issued a personalised risk warning statement to the member, then they cannot proceed with the payment.
Inevitably this is likely to be very frustrating to many individuals who are looking to access their pension fund, particularly as the press have talked a lot about using your pension like a bank account. However in view of the expected increase in pension/investment scams (http://scamsmart.fca.org.uk/) as a result of the new freedoms it is a process members should embrace for their own protection.