The humble Personal Pension has come of age.
Pension Freedoms have now been with us since 2015 and only now are people starting to recognise that the humble Personal Pension plan can probably describe itself as one of the most tax efficient investment plans ever.
Before 2015, the traditional Personal Pension had strict limits as to how much could be withdrawn either as income or as a lump sum. Further to that, when income requirements were considered, more problems arose. Either the guaranteed income, in the form of an annuity, was becoming poor value as interest rates reduced, or those who took income from a Drawdown plan found the limits restrictive and inflexible. Finally, it was upon death that penalties hit hardest, with tax rates on death being as high as 55% of any remaining fund.
Yet, when the Chancellor stood up in the Autumn of 2014, nobody had seen the Pension Freedom announcement coming. The new legislation offers the same generous Tax Relief for premiums paid, which can offer full tax relief which relates to your marginal rate of income tax, but policy holders are now able to pass both their Personal Pension AND Income Drawdown money down to whoever they wish on their death (rather than simply to a dependent).
Further to that, if they die before age 75, that money can be placed into a Nominee Drawdown, so that any future income drawn is tax free. Finally, to highlight just how powerful an Investment vehicle this is, this money can be passed down to future generations again and again within a Drawdown wrapper, meaning that it remains free from Inheritance Tax potentially for ever.
Therefore, with this sort of flexibility and tax efficiency, you do wonder why people don’t use this investment vehicle more when they choose to save. The whole amount can be withdrawn from age 55, (with 25% of it being paid tax free), full income tax relief is provided for premiums paid, yet it remains outside of your estate for IHT purposes.
As we approach the Tax Year end, as well as March 31st being a very popular time for Company year ends, it may be a good time to consider whether to increase your existing payments or perhaps even make a single one off contribution.
If you wish to discuss the content raised in this article, simply call 020 8476 4100 or email BFS@balpa.org