Spring Statement 2022 – Pension rules remain unchanged so why not take advantage?

There had been speculation prior to Spring Statement 2022 that the chancellor would look to reign in the perceived generosity surrounding defined contribution pensions and how they are taxed on death. However, no announcement was forthcoming. As such, pensions continue to be not only a tax efficient method of saving for retirement but also a valuable estate planning tool.

In April 2015, after many years of adjustments to the tax on undrawn pension funds (of between 35% and 82%), the government announced new, clearer tax rules which still stand today. Broadly, this means that individuals who die before their 75^th birthday can pass on their remaining undrawn pensions tax-free. After that time, the recipients are taxed at their marginal rates of income tax on any funds received. Our briefing note on this topic can be found here. 

In addition, pension funds do not normally need to be taken into consideration when calculating the value of an individual’s estate for inheritance tax purposes. As such, we are seeing an increasing number of clients treat their pensions as a ‘pot of last resort’. Why draw money from a pension if you have other funds that you can use to cover your expenditure, particularly if you will pay income tax on the withdrawals?

It should be noted that not all pension contracts, particularly the older ones will follow these rules. As such, it is vital to check with your pension provider(s) or financial adviser as to the options that your nominated beneficiaries will have when the time comes.

We have been actively encouraging clients to review their pensions so that they may take the maximum advantage of these rules for many years now and will continue to do so. Given the above there is also often considerable gains to be made through pensions consolidation, although each pension needs to be judged on its own merits, taking any preferential features of the existing contracts into consideration.

If you feel that your pension planning could benefit from a review, but are unsure of where to start, please contact a member of our financial planning team.