Minimising potential taxes and duties on your death

IMMEDIATE ACCESS TO YOUR PENSION FUNDS, ALLOWING YOU TO TAKE OUT WHAT YOU WANT, WHEN YOU WANT IT

As your wealth grows, it is inevitable that your estate becomes more complex. Money saved via a pension can be passed on to a loved one, usually outside their estate and free of any death tax, provided the pension fund has not been touched and they die before age 75. People fortunate enough not to need immediate access to their personal pension may therefore decide not to touch those savings for as long as possible.

However, once someone reaches age 75, the death benefit rules change dramatically and their entire pension fund may become subject to a 55% tax charge on death. This means it can become a race against time for many individuals to reduce the impact of this charge.

Flexible drawdown lifeline
It can take years to move money out of the 55% death tax environment using capped income withdrawals due to the set limits on the amount that can be withdrawn each year. A lifeline can, however, come in the form of flexible drawdown. Flexible drawdown can provide people with immediate access to their pension funds, allowing them to take out what they want, when they want it. Flexible drawdown is only available to people who are already receiving £20,000 p.a. minimum guaranteed pension income – which can include their State Pension entitlement.

For individuals who wish to leave as much as possible to their beneficiaries, taking income from their pension and gifting it to their beneficiaries under the ‘normal expenditure’ rules will allow certain amounts of money to be passed to their beneficiaries outside their estate.

Passing money outside your estate
This may be more tax-efficient than suffering the 55% death tax charge, or the 40% inheritance tax charge if the money is simply brought into their estate. Any money taken out under flexible drawdown will be subject to income tax, so higher-rate tax payers need to be careful to ensure the money is either passed on outside their estate tax-effectively or that their estate is within the annual IHT allowance of £325,000 (2013/14 tax year).

This may be particularly relevant for people who are approaching, or who have already reached, their 75th birthday, especially as many older pension arrangements will not allow pension savings to continue to be held beyond that date.

Younger people who have accessed their pension fund, even if it’s just to take the lump sum cash, could also be at risk of the 55% death tax, and could benefit from moving funds out of this environment as efficiently as possible.

WANT TO INVESTIGATE THE OPPORTUNITIES AVAILABLE TO YOU?

The benefits of flexible drawdown should not be underestimated. Putting off accessing your pension income could store up problems when you reach age 75. But once someone does access their pension fund, regardless of age, flexible drawdown could dramatically help with estate planning. To investigate the opportunities available to you, please contact us today.

Its good to talk

Don’t leave tricky money confersations hanging in the air this New Year

The Family Financial Tree report from Standard Life looked at the family money tree over four generations and makes some surprising findings. It reveals how families collectively manage and have talked about their personal finances.

The findings, based on survey data of over 4,000 adults in Great Britain, draw compelling conclusions about what is effectively one of the last taboo subjects for families – the uncomfortable discussions around money, inheritance and retirement.

How money flowed across four generations

The research tracked how money flowed across four generations of a family and also established how this flow of cash is reliant on families having some tricky conversations. The report also finds that many of us remain typically British and private about our finances. While we might involve our spouse or partner in discussions and future planning, few people say they communicate freely with others in their family about their finances.

Family financial plans involve all the generations

More than a third of parents (35%) and two fifths (43%) of grandparents would not ask anyone within their family for advice about finances. And despite evidence that a large volume of money is moving freely between generations, only one in four (25%) people say that their family financial plans involve all the generations. However, the attitude of new parents is very different. Almost four in five parents (79%) with children under the age of five would ask the family for money (79%) and three quarters (75%) would ask the family for financial advice.

Three distinct types of families

The research has identified three distinct types of families: ‘talkers’ and ‘gifters’, who are likely to benefit from discussing the family money tree, and ‘avoiders’, who are failing to release the power of the family financial tree.

Which type of family are you?

‘Talker families’ are the 25% of the population who involve all of the generations when planning family finances – they are likely to be open with each other, discussing salaries, upcoming bills and even inheritance.

‘Gifter families’ are families who gift money between the generations to help with both big and small purchases, whether it be a mum paying for Gran’s supermarket shopping or a granddad contributing to his granddaughter’s education. ‘Gifters’ are also likely to be ‘talkers’.

‘Avoider families’ however are the least likely to benefit from the family financial tree, as they avoid money chat in their household, particularly the more difficult conversations. This means they could be missing out on the combined strength of planning for the future together and could be making decisions based on little information about future commitments or needs.

Source:
The research is based on survey data. 4,071 UK adults were surveyed by YouGov on behalf of Standard Life between 4th and 7th October 2013, weighted to nationally representative criteria. Of the base sample, 1,633 (unweighted) parents, who were not also grandparents, were asked a series of specific questions based on their status. In addition, of the base sample, 885 (unweighted) grandparents were asked a series of specific questions based on their status. The survey was conducted online.

Is your nest egg cracked?

Making sufficient financial preparations for the future

Retirement savings have plummeted among those aged 55-64 over the past year as the cost of living continues to rise, according to Aviva’s latest Real Retirement Report.

The report assesses the impact of financial pressures and concerns across the UK’s three ages of retirement: the 55-64s (pre-retirees), 65-74s (retiring) and over-75s (long-term retired).

Savings habits have tailed off

Savings habits among those nearing retirement have tailed off in the last year, leaving 40% of 55-64s – over 2.9 million according to the latest population estimates[1]. The trend sets pre-retirees apart from both older age groups, who have succeeded in increasing their monthly savings habits in the last twelve months.
Pre-retirees have been rendered even more vulnerable by a 22% drop in their average savings pot over the last year. One in five 55-64s – almost 1.5m people – have no savings or investments to fall back on while almost one in three has less than £500 (30%).

Financial preparations for the future

As everyday living costs continue to rise, it is vital that you make sufficient financial preparations for the future, as any unexpected expenses that come your way could have a serious impact on your finances if you don’t have savings to dip into.

It is therefore particularly alarming to see the slump in savings habits among those who are nearing retirement. Putting away even a small amount each month can make a real difference if you start early enough.

Source:
[1] Office for National Statistics, mid-2012 population estimates published on 8 August 2013 show there are 7,308,618 people in the UK aged 55 to 64. The Real Retirement Report was designed and produced by Wriglesworth Research. As part of this, more than 17,686 UK consumers aged over 55 were interviewed between February 2010 and October 2013. Wherever possible, the same data parameters have been used for analysis but some additions or changes have been made as other tracking topics become apparent.