Topic: Financial Planning

Estate Planning And Your Pension

Is estate planning on your mind?

It wouldn’t have been immediately obvious to many people watching the 2014 Budget that the government was unveiling radical pension reforms.

That’s because the change announced by the Chancellor was, at least on the face of it, simply a tweak to the tax rules on pensions. It meant that members of Defined Contribution (DC) pensions could access their entire pension pot from the age of 55 without incurring heavy tax penalties. Up to 25% could be taken tax-free, with the remainder taxed at the saver’s marginal rate instead of the previous 55%.

However in practice, the Chancellor’s package of reforms, which took effect in April 2015, changed the entire pension landscape. It also affected the tax treatment of pension funds at death and the complete package created an opportunity for those looking to pass on wealth to their loved ones as tax-efficiently as possible.

Leaving a legacy

 HM Revenue & Customs took £5.4bn in IHT receipts in the 2018/19 tax year. If current trends continue and the existing rules remain in place, those takings could reach £10bn a year by 2030, according to Canada Life.

While IHT still only affects a relatively small number of families, its impact can be considerable. The tax is charged at 40% on the amount of any inheritance passed on above the nil rate band, which for more than a decade has stayed at £325,000. Someone passing on their main home to a direct descendant can also benefit from the main residence nil rate band, currently £175,000.

Cushioning the blow

The good news for those worried about IHT is that there are several ways of mitigating its effect or avoiding it altogether. That includes by factoring in any DC pension funds you have.

If you have a DC pension fund (whether it’s an occupational pension, personal pension or self-invested personal pension scheme) you can usually complete an Expression of Wish, which tells the trustees of your scheme who should ideally get any money left in your pension fund, or receive any other death benefits from the scheme, when you die.

This can be amended over time, ensuring that it continues to reflect your wishes and incorporates any changes in your preferences or circumstances. And because the trustees ultimately have discretion as to whether they follow your wishes or not, this money usually won’t then count as part of your estate for IHT purposes.

Death, taxes and drawdown

 Prior to the 2015 reforms, the hefty tax on pension pot withdrawals meant that for most people, taking their allowable tax-free cash and then buying an annuity with their remaining pension fund was the only realistic option. With the reforms, however, leaving pension money invested and drawing it down as needed has become the more mainstream option.

Just 11% of people accessing their pension pot in the 2018/19 tax year used it to buy an annuity, compared with around 90% prior to the pension freedoms.

Before 2015 a pension fund could only be passed on tax-free if it hadn’t been drawn on yet. Now, if you die before age 75 it can be passed on tax-free even if you had started drawing on it. That’s unless you had exceeded your Lifetime Allowance for pensions – currently £1.073m for most people – when a Lifetime Allowance Charge would be payable.

If you die after the age of 75, your beneficiaries will be liable for tax on the pension fund they inherit. The amount paid depends on whether they take it as a lump sum or as a retirement income, when they would pay income tax on it at their marginal rate.

Since 2015, it’s also been possible to nominate anyone as a beneficiary for your drawdown pension fund and any future payments made from it. That person no longer needs to have been financially dependent on you. So you can nominate a specific individual (or individuals) to keep benefiting from your pension fund after you die. They will be able to continue doing this – passing the fund on to their own beneficiaries in time where relevant – keeping the remaining money in the tax-efficient pension wrapper until it runs out.

While this might sound fairly trivial, for some families it is anything but. It means that pensions can now be an effective way to transfer wealth between different generations within a family, and to non-taxpayers, such as grandchildren and non-earning spouses or civil partners.

 The bigger picture

 All of this has helped make pensions more attractive as a tax planning tool. But there is a big caveat to keep in mind: you can only pass money on if you haven’t exhausted your funds by the time you die. Spending the inheritance is one way of approaching the thorny issue of IHT, but for obvious reasons it’s not always a popular one with families.

In other words, being able to pass on drawdown funds at death means being able to strike an appropriate balance between drawing down the income you need during retirement while making sure your funds last for as long as you live – and beyond.

This is a complex area, and one in which the experience and expert knowledge of a professional financial adviser can make all the difference. At Alexander Grace, we can walk through the various issues with you and help you understand whether you might benefit from building your pension into your plans for passing money on.

Is estate planning on your mind?

From starting the process to reviewing existing arrangements, we have the expertise to help. Please contact us if you would like to discuss any estate planning need.

You can do so by calling 01675 443189 or emailing us at

Important information

This article is provided by Alexander Grace for general information only and takes no account of personal circumstances. It is not a recommendation to buy or sell. Please be aware that the value of investments can fall as well as rise, so you could get back less than you invest.

Tax treatment depends on individual circumstances and may be subject to change in the future. Laws and tax rules may change in the future without notice.

Registered in England & Wales No: 4138186

Alexander Grace Limited is authorised and regulated by the Financial Conduct Authority

Life After Lockdown

Saving Money

Life after lockdown: A good time to review your plans?

One of the defining features of the coronavirus lockdown has been the range of emotions many of us have experienced.

As a ‘black swan’ event – something rare, unexpected and emerging seemingly from nowhere – crises like the coronavirus pandemic come naturally as a shock, turning our lives upside down in a very abrupt and disorientating fashion.

The pandemic has taken an obvious toll on people all over the world. Anxiety and fear have been defining features for many, with uncertainty about the future, for individuals, families, businesses and society.

However, everyone has their own, unique experience of any event and for many of us there has also been a positive side. With more time to reflect and a taste of a different way of life, there has been hope and optimism that something better may emerge from it all.

Putting a price on it

 The lockdown has brought economic activity to a shuddering halt and the easing of restrictions over the coming weeks and months will begin to tell us more about the long-term effect it is going to have on our personal finances and the wider economy.

We already know the economy took a sharp hit, shrinking 20.4% in April, the first full month of lockdown. We also know the government’s job retention scheme had seen over nine million UK employees placed on furlough by mid-June, and that self-employed workers had made 2.6 million claims for grants available under the Self-Employed Income Support Scheme (SEISS).

While it’s clear from these figures that some will be worse off, large numbers of people have also seen their financial situation remain relatively unchanged or even improved. With no travel, shops, restaurants, bars and other such services to spend money on in recent months, some households will have seen savings mount up.

A new focus on protection

 Most of us are familiar with the need for a rainy-day fund – an emergency fund that, typically, can cover at least three months of living expenses should our usual source of income dry up.

For those households that have experienced job loss or a significant reduction in income as a result of lockdown, that rainy day will now have arrived.

Research suggests that even in normal times, one in five Britons would struggle to survive financially for more than a month in the event of suddenly losing their job, while 30% would only be able to live off their current savings for up to six months. If you were fortunate enough to have a good savings buffer in place when coronavirus hit it may have given you a new appreciation of the importance of being protected and a determination to replenish for the future.

Uncertainty and nervousness about incomes and finances has certainly caused some to think about what might happen to their family should the worst happen. Law firms reported a sharp jump in enquiries about wills amid the coronavirus outbreak, suggesting people were putting their affairs in order having been confronted with reminders of their own mortality.

Those same factors may linger for some time, prompting families to either review the extent to which they are already protected or to make sure they have something in place for the future, from emergency savings to wills and protection insurance.

A new set of challenges for businesses

 The current situation will be giving double food for thought to those who have a business to think about as well as their personal and household finances. Businesses in a range of sectors are now reviewing how they operate, from remote working and whether they need premises, to what kind of new practices to introduce and how the crisis affects their prospects.

More than half of small business owners are worried about long lasting damage to their firms, according to research published in June by Visa. But nearly 40% said they had adapted their business model in order to keep going during the lockdown, reflecting a trend of firms that have diversified their operations and which may continue to do so when the crisis eases.

While support such as bounce-back loans has been made available, the same conversations will be happening in a lot of small firms: how to protect what they have, including their business operations, their employees and their key people.

Time to act?

 Whatever the impact on you personally, you may have had more time to think in recent months. Perhaps you have been directly touched by the pandemic. Maybe the sheer scale and pace of developments have made you reconsider what you want from life. Or perhaps the absence of what we think of as ‘normal’ life has made you see things differently and appreciate what you most value and enjoy.

As the country steps hesitantly out of its coronavirus shell, there may be a temptation to try and resume life as before. But if you do want to see something good emerge from it all, now might also be the time to do something about those thoughts, plans and good intentions to change.

However it’s been for you, if you’re emerging from this with a new set of goals and priorities in life – and perhaps for a business too – you’ll want to be sure that your financial plans are aligned behind them. These are the times that we at Alexander Grace are prepared for – helping take the emotion out of decisions and working with you as your life and priorities continue to evolve.

 Considering changes?

 If so, we’re here to help. Please contact us if you have questions or would like to talk about reviewing your current financial plans.

 Important information

This article is provided by Alexander Grace for general information only and takes no account of personal circumstances. It is not a recommendation to buy or sell. Please be aware that the value of investments can fall as well as rise, so you could get back less than you invest.

Laws and tax rules may change in the future without notice.

Registered in England & Wales No: 4138186

Alexander Grace Limited is authorised and regulated by the Financial Conduct Authority