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Pensions get a kiss of life

19th Mar 2015
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ICPA is a professional organisation for accountants in practice.

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Pass it on to clients – new rules have suddenly made investing in your pension worthwhile, says Roddy Kohn

Despite enormous amounts of publicity surrounding the new pension rules, understandably some investors are confused. This should not be much of a surprise; as usual few of the changes that are due to come into effect spell out the ‘what-if’ scenarios if you are looking to retire now. And if you are ready to retire, or must before the new rules come into effect, then my advice is simple. Seek advice.

However, for the purposes of this feature the goal is to firmly fix our gaze on the star attractions of pensions post April 2015.

So what’s so exciting? It has to be said, the pension reforms as proposed are long overdue but nonetheless very welcome. In simple terms, a pension that offers attractive tax incentives, generous contribution limits and the ability to cherry-pick how and when you take your benefits means pension savings have been given the kiss of life. And there’s more – much more.

Gone are the days of having to buy a fixed income for life with your pot of money. This was called buying an annuity. Gone is the compulsion to invest through one insurance company with its pathetically limited range of investment options, typically comprising the US, UK, Europe, Japan and a bit of fixed interest. Today’s pension investor can dare to dream of more; much more, in fact. More investment choice, more options about how to take their income, more ways of keeping what hard-earned money they have built up within the family when they die. So here are the bullet points. They serve not to make you an expert, but simply to highlight why your cash deserves to think of pensions once more as a good home for your money:

• Tax relief up to highest rate of tax paid.

• Tax fee cash of 25% of the pot accrued. This can be taken from age 55 without the need to draw a pension.

• Take your pension income your way, either in dribs and drabs or all at once (just remember you’ll pay income tax at your highest rates on it).

• Want to withdraw just the tax-free cash and leave the rest to the children? Go ahead! On death you can pass your fund to your children (doesn’t have to be your children, it can be anyone), and this will be outside of your estate for inheritance tax purposes. Moreover, your nominated beneficiary will have access to the pension even if they are younger than 55 (whether they can access it tax free or not depends on whether you died before or after age 75). And it doesn’t stop there; the fund can pass down the generations without IHT consequences. It’s a great way of transferring wealth down the line. So to minimize inheritance tax, draw down on other assets and let your pension be the last port of call.

• Want to draw a mixture of tax-free cash and income at the same time? Go ahead!

• How about drawing a big chunk of money, then nothing for the next three years, then drawing a regular income per month? Go ahead!

The new pension rules mean that no matter how many ways you try to slice it they can facilitate your request. It would be too much to expect that all pension companies can meet all this flexibility – they can’t. You may need to switch away from your provider to get the benefits of the new legislation. Frankly, that’s a small price to pay for the new freedoms.

As my accountant recently reminded me, good advice is worth paying for, so if your pension pot is over £50k think about getting advice on what’s best for your circumstances.

• Roddy Kohn is managing partner at KohnCougar. He can be contacted at [email protected]

This article is taken from “Accounting Practice” the ICPA quarterly magazine. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at www.icpa.org.uk  or email [email protected]  or by phone on 0800-074-2896

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