Claire Trott: The key pension dilemmas ahead of April

All the hype of the pension reforms being announced in last year’s Budget and the following rush to get new legislation in place has now subsided to a certain extent.

With less than 100 days to go until the beginning of the new tax year and the implementation of the new rules, the task for providers is to be prepared for those clients wanting to take their cash from 6 April. For advisers and their clients the challenge will be different: they need to be prepared for the issues associated with the new freedoms and in some cases this will mean pre-planning.

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Capped drawdown decisions

Capped drawdown will cease to exist from 6 April for new clients but it will be available for those that are already in capped before the end of the current tax year. With all the flexibilities soon to be available there could be little point in worrying about the demise of capped drawdown but with the knock on effect to the annual allowance, this brings another issue.

Speaking to advisers, the restriction that accessing income through an uncrystallised funds pension lump sum or flexi-access drawdown imposes on the annual allowance for money purchase contributions is something that should be avoided if possible. This is not to say that these advisers feel their clients are definitely going to make contributions in excess of the £10,000 allowed, rather they want to be able to offer the flexibility should it be needed. In many cases, as there is no need for income now and they do not want to unnecessarily take money from a tax privileged environment, clients will be crystallising the smallest amount possible into capped drawdown.

Provided the capped drawdown is written under one arrangement, further units can be crystallised into capped drawdown in the future and income taken without triggering the money purchase annual allowance rules.

Care needs to be taken if clients accessed some of their funds through capped drawdown some time ago because certain policies were, and still are, written as tranches into a new arrangement each time a crystallisation occurs. This would mean any new crystallisations would likely be deemed flexi-access drawdown, so if any income is then taken the MPAA rules will be triggered.

One other factor to consider is transfers of funds already in capped drawdown, as this will mean a split of the arrangement into two. The first arrangement will be the drawdown fund and the other will hold the uncrystallised fund, again forcing new crystallisations to be a flexi-access drawdown and trigger the MPAA rules.

Death benefit conundrums

Death benefits are also big on the agenda for this year. Many will be reviewing their expression of wishes forms to ensure the most appropriate person is named. The flexibility to name any beneficiary as well as the ability, if left to beneficiaries flexi-access drawdown, to continue to pass it down and across generations forever means more decisions and even greater implications of those decisions.

My initial thoughts were that advisers and clients would be revoking their nominations to bypass trusts on mass but this may not be the case if control or money leaving the direct family is an issue. Bypass trusts, with their structure and flexibility, means trustees can ensure the money goes to the correct people over the years but in a pension the tax treatment may be significantly more favourable.

When passing flexi-access drawdown down the generations, each nomination is made by the person holding the pot at the time, so this could mean that marriage, divorce, stepchildren and the like could alter the original intended path of the funds. It would actually only take one person to take the whole pot out and the flow of income between generations would be lost, however large it originally was.

Clearly, pensions are not the only issue for advisers to consider with their clients ahead of the tax year-end. The added complexity and new intricacies and interpretations that appear with every round of legislation will make for an exciting first quarter of this year, ready for the real onslaught as we see how the changes take shape in practice.

Source: Money Marketing,  Claire Trott, Head of technical support at Talbot and Muir, 20th January 2015

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