Posted on: 23rd Aug 2017
New rules have made it easier than ever for savers to help out their children.
The “Final salary pension transfers have hit an all time high, with a surge of savers giving up their defined benefit in favour of a generous lump sum. According to financial advisors, since the introduction of the new rules two years ago, there has been a £50bn boom in pension transfers.freedoms” that were introduced in 2015 have had a marked effect on savers.
This new opportunity has also had a knock on effect for children and benefactors of pension savers, as the pension lump sum can be passed onto dependents, free of inheritance tax.
Change in Transfer Rules and Benefits
transfers have always been possible under previous rules. Anyone who was a member of a final salary pension scheme, known as a “defined benefit pension” had the right to swap to a “defined contribution” pension pot. This meant that a guaranteed income based on salary and length of service, was swapped for a sum of money, that would then normally be invested, to produce an income or used to buy an annuity.
Until the “pension freedoms” of 2015, demand for such transfers was limited. In fact, most financial advisors avoided them, like the plague! This was because the inflation-linked income that was provided by a final salary pension was seen as the “gold standard” and any money transferred out of such a pension would attract punitive taxes when passed on at death. Things changed in 2015.
Pension Freedoms change the game
The introduction of “pension freedom” in 2015 changed the game considerably. With far greater control over the transferred pension sum, tax changes and historically high value of transfer offers, more people than ever have been looking to transfer out of their defined benefit pension.
In the last two years, close to 210,000 people have moved pensions worth £50bn out of final salary schemes.
No more Death Tax
One of the most beneficial changes of the pension freedoms of 2015 was the abolition of the “death tax” on unused pensions. Although not reported as widely as high transfer values, it is arguably one of the biggest perks for savers. Particularly amongst those who have children or beneficiaries who need financial support.
For example, a final salary pension scheme delivering £30,000 of annual income would most likely pay one half or two thirds of this amount as a “spouse’s pension” after the death of the original member. The maximum likely is therefore up to £15,000 a year.
The current high transfer value for a £30,000 pension could offer anything up to £1m as a lump sum to the pension holder. In the event of death before 75, this entire amount could be passed on, tax free, to a spouse or children. If the pension holder dies after the age of 75, tax is paid at the income tax rate of the person who inherits the pension, or a flat 45pc if it taken as a lump sum.
The benefits are that the inheritor can access the money immediately, rather than waiting until their own retirement, and with careful planning around when income is taken, pensions can sometimes be drawn down free of income tax, too.
An Opportunity for Final Salary Pension Holders
All of this represents a considerable opportunity for final salary pension holders. For savers, it makes sense consider a final salary pension transfer, particularly where children and loved ones might benefit considerably.
However, government rules are clear that you must seek advice from a regulated financial adviser, such as a Haven Financial Advisor, before you give up a final pension worth £30,000 or more.
In the last year it has become common to be offered a “transfer value” of 30 times the annual income produced by a final salary scheme, which will mean that you will need to take advice, even if your pension is expected to pay just £1,000 a year.
Talk to us today, and we can help you provide for you and your family’s future.