Are you utilising your pension savings efficiently?

A lack of planning could lead to an unexpected
55 per cent death tax on pension savings

A worrying number of people in retirement are not utilising their pension savings efficiently, according to statistics revealed by Skandia (30/07/12). This could result in their pension funds being subject to an unexpected 55 per cent tax charge on death. This tax charge could be avoided or reduced in many cases.

Not taking an income
The data provided by Skandia shows that 59 per cent of customers in ‘capped drawdown’ are not taking an income. These are individuals who have taken their maximum tax-free cash lump sum and left the rest of their pension fund invested. The remaining pension fund is technically in ‘drawdown’, even though they are not taking an income, which means that the remaining pension fund is subject to a 55 per cent tax charge if paid as a lump sum to a beneficiary on the member’s death.

Substantial tax charge
For those who die below age 75, this tax charge was increased from 35 per cent to 55 per cent in April 2011, so many people may still be unaware of it. The 55 per cent tax charge is a substantial figure, and if applicable to you, it is essential that you obtain professional advice to see how best to mitigate this tax liability.

Some key areas to look at include:

Under age 75
It is only money held in drawdown that is potentially subject to a 55 per cent tax charge on death under age 75. Untouched pension funds can be left to beneficiaries without any tax charge.

You could consider phasing the amount you move into drawdown, using tax-free cash to provide part of your immediate income needs.

You could consider taking an income from the remaining money in drawdown. If you do not need the income, you may reinvest it back into a pension as a contribution. Contributions will benefit from tax relief, and the pension fund built from those contributions will not be deemed in drawdown, so will not be subject to a 55 per cent tax charge on the member’s death before age 75.

‘Flexible’ drawdown can be used to enable
money to be moved out of the 55 per cent
taxed environment at a much quicker rate than ‘capped’ drawdown. To qualify for flexible drawdown you must be receiving at least £20,000 guaranteed pension
income a year and have unrestricted access to the remaining pension fund.

Age 75 onwards
All money left in a pension is subject to a 55 per cent tax charge on death, regardless of whether the funds are in drawdown or not. If appropriate, consider accessing as much of your pension fund as possible to move money outside of this 55 per cent tax charged environment.
Flexible drawdown can again be used to move money out of the 55 per cent taxed environment at a quicker speed than capped drawdown allows.

Unnecessarily high exposure
Leaving money inside the 55 per cent taxed environment may not always be a bad thing, especially when taking into account income tax and inheritance tax implications if it is moved to within your estate. It only becomes a concern if a lack of planning gives you an unnecessarily high exposure to this 55 per cent death tax, when action could be taken to reduce your exposure.

Exacerbating the situation
The current economic climate is probably exacerbating the situation, because people may be delaying taking an income until gilt yields and stock markets improve as this could help secure a higher income level. Delaying income could be part of your long-term financial plan; however, if you are unaware of the implications your actions could have, your beneficiaries may, on your death, face an unexpected 55 per cent tax charge on part of those savings.

All figures relate to the 2012/13 tax year. A pension is a long-term investment, and the fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

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