Pension Planning

The new ‘pension freedom’ rules announced in the 2014 Budget and which took effect from April 6th 2015 create opportunities for people to take money from their pension funds as and when they want to. Flexibility of withdrawals combined with income tax reliefs on contributions makes pension funds an attractive tax shelter for most people – which they were not under the old rules. On top of that, pension funds are outside your estate, and with the abolition of the old ‘death tax’ on money remaining in the fund on death, they can now be used to pass capital on to future generations free of inheritance tax. With careful planning, the beneficiaries (perhaps including grandchildren) may be able to withdraw substantial sums without paying income tax.

For many people, making additional contributions to their pension funds now makes sense – because they will have access to the capital and the taxation of withdrawals is fair. It can even make sense to think about using some of the capital you have accumulated in ISAs to top up your pension fund, provided you can get tax relief on the contributions.

For people who are members of company pension schemes, the real issues about pensions arise at retirement, when it is usually necessary to move the plan to an independent pension provider to benefit from flexible withdrawals.

For people approaching retirement and in retirement, the single biggest issue is investment. What investment strategy should you adopt? Many people struggle to get to grips with the consequences of the increase in longevity, one of which is that their pension fund will have to support them for up to 30 years. Actuarial studies suggest that one in four 65-year old males alive today will still be alive in 2040. There is a real danger of taking too short-term a view and if you are very ‘risk averse’ and (by holding a lot of capital in cash or fixed interest investments) expose yourself to the risks of inflation, you may be guilty of what academics have started to call ‘reckless conservatism’.

If you want an income that rises in line with prices, you need to invest a large proportion of your assets in investments like shares and commercial property, whose values are almost certain to fall in any financial crisis, as they did in 2007-08. Protecting income and capital from the risk of crises and crashes is an issue we always address with clients. Though there is no perfect solution – any form of insurance against disaster costs money, which will reduce your investment returns – there is a variety of techniques we can use to limit potential losses.

Should you pay to top up your State pension?

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