Articles - Life without the Lifetime Allowance

18% of over 55s don’t intend to access their tax-free pension lump sum so they can pass on more wealth to loved ones, following LTA removal at the Spring Budget. Almost half (46%) of all consumers agree the tax-free cash cap should increase in line with inflation. Standard Life outlines tips to help ensure your loved ones benefit from your pension.

 Following the removal of the lifetime allowance (LTA) earlier this year, new research1 from Standard Life, part of Phoenix Group, reveals almost a fifth (18%) of over 55s do not plan to access their tax-free pension cash, so that they can pass on more wealth to loved ones without incurring inheritance tax (IHT) charges.
 Men are more likely to do this than women (36% compared to 23%), while 38% of workers also plan to or are also considering leaving their tax-free pension cash where it is than those who are not working (17%).
 As pensions usually don’t count towards a person’s estate, they can be passed on completely tax-free if someone dies before the age of 75. With no LTA limit, as well as an increased annual pension allowance, pensions have become an attractive option for those looking to mitigate IHT. However, almost three in ten (29%) of over 55s say they didn’t know about this.
 Support for tax free cash cap to increase with inflation
 Since the LTA has been abolished, the amount that can be taken out of a pension as a tax-free lump sum has also been capped at 25% of the old LTA. Standard Life’s research gauged views around whether this should increase in line with inflation, with almost half (46%) of all consumers agreeing it should. Only 5% disagreed, with 30% feeling unsure.
 Dean Butler, Managing Director for Retail Direct at Standard Life comments: “Many people want to leave their assets to their children or other loved ones, and passing on your pension plan is now one of the most tax-efficient ways to do this. The announcement that the lifetime allowance would be scrapped in March’s Budget supercharged the attractiveness of defined contribution pensions as a means of passing on wealth, and clearly a proportion of over 55s are intending to leave their tax-free lump sum untouched to make the most of this. It’s worth being aware that we could see more changes to pension allowance rules in the future, but for now, the removal means there’s scope to pass on an unlimited sum for those who die before the age of 75 tax free or at the beneficiary’s marginal rate after that age.
 “Making decisions around your pension pot, such as if and when to start accessing your cash, and how best to pass any wealth on, can be complex. It’s important to understand the different options and their various pros and cons, and ensure you have the information you need to help you make these decisions. Taking guidance or advice can help you make the appropriate choices for your circumstances – if you’re unsure where to start, speaking to your pension provider or using the government’s free Pension Wise service can be a useful first step.”
 Dean Butler offers tips to help ensure your loved ones benefit from your pension:
 1. Make sure your pension offers death benefits “A death benefit is the money that is paid out after your death. Most modern pensions will allow you to nominate whoever you want to inherit your pension savings when you die, and they’ll give a range of options to those who benefit. However, not all pensions are the same. An important first step therefore is to check with your provider if your pension offers what you need.
 “If you find that your current pension plan doesn't offer the death benefits flexibility you'd like, you might have the option to transfer it to a different type of plan or even another provider. However, not all plans will allow this and transferring won't be right for everyone so do seek advice for your circumstances.
 2. Tell your pension provider who you want your pension to go to – “While there can be practical, financial and emotional benefits to making a will, what people don't always realise is that your will doesn't usually control who inherits your pension savings. Your pension provider or trustees will ultimately decide where your pension savings go. They will take into account your wishes if you have specified the people and causes that you want to receive it, but they aren’t bound by them, so it’s important to make sure they’re named.
 “Most modern pension plans will allow you to say which people or causes you'd like your money to go to when you die, however, check with your provider or employer, because the process for naming your beneficiaries can vary.
 3. Regularly review your beneficiaries – “Once you've nominated your beneficiaries, it’s important to review them regularly and update when necessary. Wishes and plans change, especially after big life changes such as having children or grandchildren, marriages and divorces. If you don't keep all your pension plans up to date as your circumstances change, you risk your pension savings not going to the right people if you die.
 4. Consider the tax they’ll pay when they receive your pension – “Pensions can be a tax-efficient way of passing on your wealth because they aren't part of your taxable estate, so inheritance tax doesn't usually apply. Now that there is no lifetime allowance limit, pensions offer an even more attractive option.
 “However, other taxes, such as income tax, may apply. If you die before the age of 75, your beneficiaries will normally inherit your pension pot tax-free. If you die after the age of 75, then your beneficiaries will pay income tax on anything they withdraw from your pension savings. The amount of tax that needs to be paid on your pension savings will depend on your individual circumstances and that of your beneficiaries, including the type of pension you have. Tax and legislation may change and your own individual circumstances, including where you live in the UK, will have an impact on your tax treatment.”

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