Lowes Magazine Issue 118

TAX

PENSIONS

PENSION FREEDOMS HAVE ALLOWED THOSE OVER 55 the flexibility to withdraw their pension as they wish, and the latest data from HMRC suggests an increasing number of people have been making use of this facility, potentially due to the impact of the COVID-19 pandemic. The pandemic has affected people’s finances in different ways. For many it has made for harder times and with the potential for unemployment to rise further over coming months, the temptation can be to withdraw from a pension. This can be for our own needs but also to help out family. There are very strong reasons pensions should not be accessed until they are needed for their primary purpose, i.e. providing an income in retirement. This is particularly so in an age where the average life expectancy has been rising and pensions now need to last a lot longer than just a few decades ago and where State Pension provision is being changed in terms of when it is received and how much it will be worth in years to come. We strongly advise against accessing a pension pot without the benefit of Independent Financial Advice to help identify the potential risks from personal tax, future income and inheritance tax perspectives. Here are five key points to consider before early accessing a pension – which of themselves, serve to highlight the complexities involved. 1. Which pension to access? Many of us have more than one pension. These can be a mix of final salary and defined contribution. As such, they could have different benefits built in, such as a guaranteed rate or additional death benefits, or they could charge different fees and have different amounts held; the latter can affect the tax paid and whether the pension pot can be drawn with or without financial advice. 2. How do you want to access the pension? There are various options. You will need to consider how much you want to take and how frequently you wish to take it. 3. Should you just take the tax-free cash? People tend to think they have to take the 25% tax free lump sum in one go but in fact, you have flexibility over how much you withdraw. It is not always beneficial to take the full 25% in one go if you don’t have an immediate need. It could be better to take the tax-free cash out in stages. Remember also, the longer the money is kept invested, the longer it has to continue to grow and provide for your retirement. 4. Tax charges Withdrawing money from a pension can trigger the Money Purchase Annual Allowance (MPAA), which would immediately decrease the annual amount you can save into a pension to just £4,000 a year. If you are accessing a pension to help out in tough times but still want to work and plan to top up your pension at a later date, going over the £4,000 allowance would then generate a tax bill. 5. Pensions pots are now useful tools in inheritance tax mitigation They provide generous death benefits and notably, they are not subject to inheritance tax. This can make pensions the very last asset you want to access if you plan to leave a legacy for your children or grandchildren. Dangers of early accessing pension pots

Tax relief when helping family

DURING THE CORONAVIRUS PANDEMIC MONETARY support from family has often provided a financial lifeline for people as redundancies and furloughing have taken a toll on the employment market. This situation is likely to continue in the months ahead – evidenced by the Chancellor extending a tapered furlough scheme until September – while the economy looks to get back on its feet. Tax mitigation is probably not foremost in a person’s mind when helping loved ones through tough times but there are ways to provide that support and help reduce inheritance tax bills for beneficiaries later down the line as well. One of the inheritance tax exemptions that can be overlooked when financial planning is the normal expenditure out of income exemption. As well as providing regular payments for the beneficiary, this can be useful in particular situations to help reduce tax liabilities, such as immediate relief from inheritance tax (IHT). The current rules allow for regular payments to be made as part of a person’s normal expenditure. They need to be habitual payments, made from surplus taxable income and leave the transferor with enough income to maintain their normal standard of living (ISA income, whilst not taxable, can be included). If these criteria are met, the payment (or gift) is considered to be immediately exempt from IHT and therefore, won’t be included in a person’s estate for IHT calculations. However, it is important to keep clear records to demonstrate to HMRC that these criteria have been met. Outside of the current pandemic situation, regular gifting can form a sensible core of a strategy for a range of life costs – including helping with education. It may also be an option worth considering for people who are at risk of exceeding their pension annual and lifetime allowances. This may be particularly relevant, since in the March 2021 Budget the Chancellor froze the lifetime

allowance at £1,073,100 until 2026, which means a growing number of people could begin to breach the limit over the next five years unless they take action. Combined with annual exempt gift of £3,000 per person, regular payments that are IHT exempt, can provide a useful option if helping out family members.

Reviewing our pensions Lowes Consultant Gavin Burton says: With people switching jobs several times throughout their career – the Association of British Insurers estimated nowadays people will have an average

Lowes Consultants can advise more on this subject if you think it would benefit your situation.

Lowes Consultant Tim Dawson says: Many people have mixed feelings around gifting, wanting to help out family but

of 11 jobs in their lifetime – there is the risk that they will end up with a trail of legacy pension pots scattered across different providers, with no single view of how they are performing or the fees they are paying. Examining our pension plans to ascertain the potential retirement income they will deliver, whether they are good value for money in terms of the fees charged and the terms of the pension, and, accordingly, whether we need to be changing our pension, consolidating them or simply saving more, should be part of a professional pension review. Lowes Consultants work with our dedicated Pensions Technical team to ensure our clients’ pensions arrangements are the right ones for their needs.

reluctant to leave themselves without the necessary funds to cover life events, like long term care, should they occur. This is natural and our advice is that gifting to family should only be considered for money that you know you do not need now and will not need in the future. Using the normal expenditure out of income tax exemption as part of a financial planning strategy, for example when building a legacy pot for children or grandchildren, by its very nature has to be money made from surplus income. However, it can be combined with a trust, which will allow the benefactor to retain control over a portion of money should it be required in the future, such as for long term care costs.

If you know someone who could benefit from talking about their pension arrangements, please have them call 0191 281 8811 and we will arrange a free consultation.

If this is of concern to you, please talk to your Lowes Consultant or call us on 0191 281 8811. We are here to help.

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