CHRISTMAS OFFER Subscribe for £25 today CLICK HERE

Could you enjoy tax-free inheritance?

PUBLISHED: 11:35 25 November 2014 | UPDATED: 11:35 25 November 2014

Neil Hewitt

Neil Hewitt

Archant

The Chancellor's three-step approach to changing our pension provision could mean significant changes for savers. Neil Hewitt from Scrutton Bland explains more

The curtain has risen on the third act of Chancellor George Osborne’s revolutionary pensions changes. In his Spring Budget, the Chancellor announced the end of the compulsory pension annuity and ushered in the era in which pension savers, if they were mad enough to do so, could blow their savings on buying a Lamborghini.

Before the implications had been fully digested, the second act took the form of an announcement that a new variant of drawdown is to be introduced, bearing the awkward name of Uncrystalised Fund Pension Lump Sum (UFPLS).

Unlike drawdown as we know it, UFPLS will deny investors the right to draw as a separate lump sum the 25% of tax-free cash available from ‘money purchase’ pensions and will require them to combine this with the remaining 75% of the fund to provide the basis for income payments of which 25% will be tax-free.

The attraction of UFPLS was to have been the fact that because the fund as a whole would not have been crystalised, it would avoid the 55% tax charge which would otherwise have been levied on the death of the investor.

The third act in this Whitehall trilogy opened at the end of September with a veritable coup de théâtre. The Government had previously signalled that it intended to review the 55% charge on death, which it regarded as punitively high, but in the event the death charge has been removed altogether.

This means that with effect from 2015, when the changes come info effect, all undrawn pensions pots, whether in flexi-access or UFPLS, will be able to pass to nominated beneficiaries free of tax in the event of the death of the investor before the age of 75. After that age, the recipients will pay income tax on what they receive, at their marginal rate.

The immediate reaction to this news was that this made UFPLS redundant, and indeed it does make flexi-access drawdown even more attractive, because if income is drawn from either flexi-access or UFPLS funds, the annual allowance for additional pension contributions reduces from £40,000pa to £10,000pa. So if a flexi-access investor has drawn his or her tax-free cash but has not started to drawdown income from their fund, they will be able to continue to contribute up to £40,000pa.

The remaining attractions of UFPLS are that this will be a cheaper option, which may commend its use for smaller pension pots. It might also be offered by pension providers with lots of old policies on their books, who wish to make the benefits of drawdown available to their policyholders but don’t want to have the expense of administering flexi-access drawdown.

What is clear is that the attractions of pension saving have become irresistible. The tax advantages dwarf those available from ISAs, and we may well see people switching their ISAs into pensions (subject to having sufficient earnings on which to base the contributions).

If you would like to arrange an initial meeting, without obligation, please contact 01473 259201 or email neil.hewitt@scruttonbland.co.uk. Scrutton Bland Limited is authorised and regulated by the Financial Conduct Authority.

Most Read

Most Read

Latest from the Essex Life