A few pension issues to consider
Informed Choice senior paraplanner Shelley McCarthy attended a technical workshop yesterday where a number of interesting pension planning issues were raised.
As a result of changes to the pension rules which came into force on 6th April 2011, some people using Unsecured Pension (USP) have important decisions to make when they reach their 75th birthdays.
One of the changes to the Unsecured Pension rules is a change to the charge on death benefits should you die whilst in USP.
This death benefit tax charge, when benefits are taken as a lump sum, was previously 35% but has been increased to 55% since 6th April.
Whilst this previously did not apply to death benefits on pensions where the pension commencement lump sum (tax-free cash) had not been taken, it will now apply to these funds from the 75th birthday onwards.
For this reason, there is a strong argument for taking the maximum tax-free cash available from a pension fund shortly before age 75, as in the worst case scenario this part of the pension fund would then be subject to inheritance tax at 40% rather than a 55% tax charge. In doing this, it would not be necessarily to draw a taxable income from the remaining pension fund.
Another interesting discussion at the technical workshop looked at the Lifetime Allowance tax charge after age 75.
This applies to large pension funds which breach the Lifetime Allowance (£1.8m this tax year, reducing to £1.5m for 2012/13) and it was confirmed at the workshop that the option to take excess pension benefits as a lump sum after age 75 is no longer available.
What this means in practice is that the excess pension benefits would need to be taken as a taxable income, which is also subject to a Lifetime Allowance tax charge, and this results in a much larger effective tax charge than the lump sum option.
A final consideration discussed at the workshop looked at the ability to claim additional rate income tax relief at 50% for a future tax year when making pension contributions, even if the temporary 50% rate is withdrawn next year.
This is achieved through the use of pension input periods and involves a personalised strategy based on previous pension contributions and pension scheme membership in previous tax years.
It is a complex area of pension planning but something we are comfortable delivering to our clients where they can benefit from the use of pension input periods to maximise tax relieved contributions.
Keeping up to date with technical developments is an important part of our continuing professional development here at Informed Choice.
We always want to ensure that our team not only holds the highest levels of professional qualifications but also remain well informed when it comes to the technicalities we can apply to our recommendations for clients; helping our clients to build, manage and protect their wealth.