Pensions legislation has a nasty sting in the tail
13/11/2007
Well off retired Brits who do not take available tax free cash or income from what they consider to be surplus pension funds, could inadvertently be lining the Treasury’s pockets - simply by not being aware of and guarding against Gordon Brown's new taxes, of up to 82%, on residual Alternatively Secured Pension (ASP) funds on death.
Under current rules, those who have opted for drawdown as an alternative to more traditional annuity planning - a strategy typically deployed by the better off - may be tempted at age 75 to transfer into an Alternatively Secured Pension (ASP) scheme. But Paul Wilcox, Chairman of the specialist fund managers, WAY Group, has warned that those ending up with residual ASP funds could be hit by punitive Treasury taxes unless they make appropriate arrangements.
He said: “If people have sufficient income from sources other than their pension funds, it doesn’t mean they should leave their pension funds untouched until they die. Thinking that they are leaving £100,000 to their loved ones is sadly wrong as the amount may shrink to a meagre £18,000 if no action is taken ahead of time.
“Although dodging the full 82% tax on any residual ASP funds may not always be possible, there are the means of making sure that the lion's share of any 'surplus' pension funds find their way to beneficiaries and not to the Treasury."
As with every pension plan, pensioners have the option of drawing tax free cash - which should be withdrawn and gifted into a flexible trust for Inheritance Tax (IHT) mitigation. Following survival for seven years the whole of this fund will fall outside the IHT net. They then can take a maximum pension which, being surplus to their living requirements, can be gifted each year (with immediate exemption from IHT) into a 'gifts from income' flexible trust - again for IHT mitigation. Although this income will be taxed at up to 40% it will have arisen from contributions which themselves attracted and grew under a similar rate of tax relief, and is therefore tax-neutral.
Any further growth on either of these two elements will then take place outside the taxable estate of the pensioner. By planning and taking action well in advance of one's twilight years, it is possible to divert funds away from one's potentially highly taxable residual ASP pension and place them safely into an IHT-free environment for one's beneficiaries.