Case studies


by | May 20, 2020 | Case studies

Significant changes have been made to the tax treatment of pensions in recent years.  While most publicity has focussed on the rates of tax relief for pension saving, the tax position on taking benefits has also changed significantly.

Michael has during his career navigated several changes in pensions tax relief and managed to build a sizeable pot of pension savings.  He is also able to live off other income and can take a strategic perspective on what to do with his pensions.

Our first intervention with Michael has been to consider whether or not he should elect to take advantage of the current Lifetime Allowance (LTA) of £1.8m.  If he makes an election and stops any further pension savings before 6th April 2012 his LTA will be set at £1.8m and not reduced to £1.5m.  Whilst Michael’s savings have not yet reached £1.5m we concluded with him and his IFA that he should elect for protection and thereby give his pension savings some headroom for future growth.

Next with Michael’s IFA we reviewed the broad range of options available to him.  Michael was pleased that he no longer has to buy an annuity and can decide to “wait and see” or instigate a drawdown of his pension benefits.  After ruling out the more radical option of taking flexible drawdown; accessing the whole of his pension savings in one tax year, whilst not tax resident in the UK, Michael decided to start drawing down a modest amount of pension income.

In fixing the amount of pension income drawn down each year, we looked long and hard at Michael’s tax profile to ensure that the pension income does not suffer marginal tax rates of 50% or 60%.  Drawing down certain segments of his pension savings has enabled Michael to take some tax-free cash and limit his exposure to legislative changes in that area.

A key component in Michael’s analysis is his family.  He knows that his children are likely to need some support in the future as they pursue vocational jobs and will wish to start their own families.  Michael is surprised to find that on death his pension savings can pass on to his family in a number of different ways with varying tax treatments.  Furthermore that tax treatment varies depending upon whether he dies before or after age 75 and whether he has started to draw some pension benefits or not.

We helped Michael to see that leaving his pension assets to his wife Suzy was not entirely sensible from a tax perspective, as Suzy was independently wealthy and would pay income tax at 50% and have a substantial IHT liability on death.  Michael decided to set up a bypass trust over his pension assets.  In that way if he died before age 75 his pension benefits would escape both a 55% tax charge for leaving lump-sums and also any further IHT that would have arisen had the money passed through Suzy’s estate.

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