Pensions and IHT planning

Tax Comments Off on Pensions and IHT planning

From April 2015, it appears the over 55s will be able to use their pensions “like bank accounts” and withdraw cash to invest or spend as they wish.

What are the changes?

From April 2015 the rules will change:

  • If a pension saver dies before 75 (whether or not the pension has been touched) the funds could pass to beneficiaries completely free of tax.
  • When someone dies aged 75 or over, there will be no 55% tax charge, but instead the recipients will pay income tax on the money withdrawn from the fund at their marginal tax rates.

This could be very attractive. For example, a higher-rate tax payer could make a pension contribution of £30,000, which is worth £50,000 after tax relief. If this was unspent then at his death, the £50,000 could pass to his children tax-free (if he dies before 75) or be withdrawn in stages subject to income tax.

The new pension rules therefore offer an incentive for older, wealthier workers to maximise their pension contributions. Indeed, putting spare cash into your pension should now be considered along with giving the money away to avoid IHT.

Planning options

Families can now consider using pension plans as a means of passing wealth to the next generation in a tax-efficient manner. Your children will have the option of keeping the money inside a pension (tax free) for as long as they want, taking an income from it when they themselves retire, or even helping your grandchildren to pay for education or to buy a property.

If you are approaching retirement, it could even be worth borrowing the money to top up your pension. If your circumstances permit, you could borrow say £75,000 to make a pension contribution for 2014/15 (making use of unused relief for the previous three years).

If you already had £131,250 in your pension pot, the new contribution of £75,000 would increase the fund to £225,000 (with tax relief added) and you could then use the 25% tax-free lump sum from the pension, together with your higher-rate tax refund, to repay the bank loan. At no cost to you, your pension pot could have risen by £37,500.

These figures, are dependent on the Government not reducing the tax relief on the money put into pensions.

If you would like any further information on pensions or inheritance tax matters, please do get in touch.

Sue Stephens