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Pensions shake-up: The new rules explained and how children WILL now be able to inherit your nest egg.
WHAT CHANGED IN APRIL 2015?
From April 2015, no one has had to buy an annuity. Instead, pension holders can keep their entire pensions invested and take money as they like.
Pension holders can nominate any person or persons to inherit their pension fund on death. The nominees of pension holders who die before the age of 75, can receive the fund income tax-free, either in one lump sum or by drawdown instalments.
Pension holders who die after the age of 75 can pass on their fund tax-free if the money remains in a pension plan. If the money is withdrawn, the beneficiary will pay income tax at their marginal rate. Should the beneficiary then die before the age of 75, any money still in the pension plan can be inherited by their nominated successor(s) free of income tax.
CAN ALL PENSIONS BE INHERITED?
No. If you have taken an annuity, or receive income from a pension scheme, the pre-April 2015 rules still apply. These pensions cannot be inherited - although they may contain a provision for a dependantís pension. The flexi-access rules only really apply for retirees who take drawdown pensions where their money stays invested.
WHAT IS THE EFFECT?
This has allowed pensioners to pass on their pension funds, when before, their families would have lost out. It has also made annuities even less popular, because pensioners do not want to lose their pensions to an insurance company.
ARE THERE ANY RISKS?
Yes - there is a danger that pensioners will run out of money in retirement. An annuity is essentially an insurance against living longer than anticipated. The annuity payments continue until death but with flexi-access there is the possibility of money running out if spent too quickly or if normal life expectancy is exceeded. This could leave the state pension as the only source of income.
When someone takes income drawdown, they become totally responsible for how their pension is used.
At present, there are still tight restrictions over who can receive income from some pension arrangements, such as defined benefit schemes, after a memberís death. Once the member has died, the pot cannot be cashed in.
This means many people in defined benefit schemes may want to transfer them to flexi-access plans.
But this could be a mistake as final salary schemes can offer generous, inflation-protected pensions as well as dependantís benefits on death, whereas the benefits provided by a cash equivalent transfer value will be determined by investment returns and could be considerably less. However, a transfer may be suitable and justifiable for some people, depending on their circumstances and objectives.
WHAT SHOULD I DO WHEN I RETIRE?
It will depend on what type of pension you have and how much you have saved. If 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 current rules to pass on your fund to your family on your death.