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Rules explained

Rules explained

Pensions shake-up: The new rules explained and how children WILL now be able to inherit your nest egg.

WHATíS CHANGING?

In a change announced at the last Budget, from next April no one will have to buy an annuity. Instead pensioners can keep their entire pensions invested and take money as they like. As a further change, this week the Chancellor announced that the 55 per cent death tax on pensions would be scrapped from next April.

It means that those who inherit cash from loved ones who die before the age of 75 will be able to receive the money tax-free. Pensioners who die after the age of 75 can pass on their funds tax-free as long as the money is kept in a pension.

If the cash is withdrawn, the beneficiary will pay standard income tax. If the person inheriting the money withdraws a lump sum, they will pay 45 per cent tax on it.

CAN ALL PENSIONS BE INHERITED?

No. If you have taken an annuity, or receive income from a final salary scheme, the current rules still apply. These pensions cannot be inherited. The new rules only really apply for retirees who take drawdown pensions where their money stays invested.

WHAT HAPPENS NEXT?

This is likely to spark a rush from middle-class pensioners into income drawdown pensions. This will allow them to pass on their pensions when before their families would have lost out. It could also make annuities even less popular, because pensioners will not want to lose their pensions to an insurance company.

ARE THERE ANY RISKS?

Yes - as there is a danger pensioners will run out of money in retirement. An annuity is essentially an insurance against living longer than you thought. The income pays out until you die. If people donít take an annuity, there is the possibility you could run out of money if you spend it too quickly or live longer than expected. All you will have to live off then is the state pension.

When you take income drawdown you become totally responsible for how your pension is used. There is also the threat that people in final salary pensions will want to cash them in.

At present, there are tight restrictions over who can receive income from a final salary pension after the policyholderís death. Once the saver has died, the pot cannot be cashed in. This means many pensioners may want to cash in a final salary scheme and switch the pot of cash in to an income drawdown pension.

But this could be a disastrous mistake as final salary schemes tend to be very generous, and the value you get for transferring one is far lower than it would be worth if left where it is.

IíVE GOT AN ANNUITY - AM I AFFECTED?

This is another blow for pensioners who have already taken out annuities. They have already been told they will not be able to take part in the new pension freedoms and, because they have already committed to a pension, they cannot now take income drawdown.

I RETIRE NEXT YEAR - WHAT SHOULD I DO?

It will depend on what type of pension you have, and how much you have saved. If like many retirees, you want a guaranteed income and donít want the complexity of leaving your money on the stock market, an annuity is still the best option.

Another idea could be to divide your fund between buying an annuity and leaving the rest of the fund invested. You can then top-up your pension payouts as you like. You can also take advantage of the scrapping of the 55 per cent death tax to pass on a large chunk of your savings to your loved ones when you are gone.


Broom Consultants Limited is authorised and regulated by the Financial Conduct Authority.