New pension rules now in place

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From 6 April 2015 new pension rules come into effect.

The two biggest benefits resulting from the revised pension rules are flexibility as to how income can be taken and the changes to the tax position on death.

The basic rules have not changed: the maximum pension contributions on which an individual can claim tax relief at either 20 per cent or 40 per cent depending on the rate of tax payable is £40,000 per year and the maximum value of pension benefits that an individual can accumulate tax free during their lifetime is currently £1.25 million.

There is no change to the minimum age at which benefits can first be taken, 55 years, nor to the maximum 25% of the value of the fund that an individual can receive from their fund tax free; money drawn from a pension fund in excess of the first 25 per cent is taxed at the individual’s marginal rate of income tax. In addition, there is no change to the rules allowing individuals to carry forward any unused relief on pension contributions for up to three preceding tax years.

The first big change relates to how income can be taken. If you wish to draw your pension fund during your lifetime, from the age of 55 years, the pension fund will be treated like a bank account with the investors having the freedom over how much they take from the pension fund. They can access their total fund as a lump sum or take withdrawals as and when needed. These new drawdown rules have the advantage over annuities that the income taken can be altered to take advantage of changes to the person’s personal tax position in future years. For farmers with volatile profits there is a big opportunity here. In the years of high taxable profits, the farmer could make a contribution to the pension fund getting tax relief at the top rate of tax and, then dipping into the pension to supplement income in leaner or loss-making years, and, with good planning, possibly drawing out the money tax free. A further important benefit of the flexible drawdown pension rules is the management of pension funds for the tax efficient funding of education fees, and, in addition keeping taxable income below £50,000, the point at which entitlement to child benefit is reduced.

The second important change relates to inheritance tax. If an individual decides not to drawdown all of the fund during their lifetime, the balance of the fund can be left to the next generation free of inheritance tax, and free of income tax in some cases, with options available to the beneficiary as to how cash is extracted from the pension fund. Personal income tax or corporation tax relief can be obtained at the time a contribution is made and 25 per cent of the fund can be withdrawn as a tax free lump sum with the balance being left to a beneficiary free of tax at the point of transfer. If an individual already has sufficient income or assets from which to fund their retirement, a pension fund can be an attractive method to make provision for the next generation. There is also the advantage over most other forms of inheritance tax planning that the person retains the option to access 25 per cent of the fund as a tax free lump sum as well as unlimited access to income in a flexible way, should it be needed for personal expenditure in the future.

As with all tax planning, the farmer must take advice from financial advisor, solicitor and accountant specific to his/her circumstances before making a final decision.