Trust Your Pension To Protect Your Inheritance

Trust Your Pension To Protect Your Inheritance
Palau by Julian Cohen. Why?

Before you rush to take advantage of the new pension freedoms, it’s worth understanding the dramatic effect this could have on your children’s inheritance

Cashing In Your Pension To Invest In Property Could Deprive Your Family Of Its Full Inheritance

Forget Inheritance, The Chatter Is All About Reinvesting Your Pension Money Into Property

Since the pension changes were announced last year, there’s been much talk of people cashing in their pension funds from April 2015, to reinvest the proceeds in property.  The arguments appear tempting, reinforced by any number of sound bites and platitudes such as these:

My pension hasn’t been performing for years...
I don’t take much notice of my pension as it’s dead money...
You know where you are with property...
There’s nothing as secure as bricks and mortar...

There’s no doubt we love property in the UK.  But cashing in pension money that’s nicely shielded from almost all forms of tax to fund property purchases is financially flawed.  There are many reports online revealing the true cost of this exercise, such as this article on Buy To Let.

The Taxman Could Be Delighted If You Draw Out Your Pension Money

It’s not just our generation that could pay the price of early encashment of pension funds, which is expected to run into billions.

A clue lies in Gordon Brown’s pension change back in 1997.  His scrapping of the tax relief on dividends paid into pension funds was predicted to yield a few billion each year.  But the true cost has been calculated at many times that.  It’s been one of the most profitable stealth taxes of all time.

Encouraging you to get your hands on your pension fund with the promise of being in control of your money, to spend as you wish, or invest in things like property, sounds brilliant.  But look under the bonnet and you’ll find it’s incredibly profitable for The Treasury.

The Tax Implications Of Withdrawing Your Pension Fund

During Your Lifetime

Pulling out your pension money could incur you in marginal Income Tax, which could be as high as 45 per cent, or more if we see a change in Government in the forthcoming election.  And once your money is out of its cosy tax shelter, if you buy property, you could be exposing it to Capital Gains Tax on any growth in the property value, and Income Tax on your rent.

After You’ve Died

When it comes to passing your money onto those you leave behind, your property values could be clobbered by the full force of Inheritance Tax.  As the executor of your will or the administrator of your estate usually has to pay your Inheritance Tax by the end of the sixth month after you’ve died, if most of your money is in property, this could be an issue.  If your property has to be sold quickly, your beneficiaries might not get the best price, reducing their inheritance.  It’s possible to pay the Inheritance Tax in instalments over 10 years, but your estate is likely to suffer interest on your Inheritance Tax bill, leaving less for your loved ones.

Why Scrapping The Pensions Death Tax Is Great News For Your Inheritance

If you’d like your children and grandchildren to really benefit from your life’s work, you need to think seriously before you pull out your pension fund.  For the ball game has definitely changed.

Instead of building up property assets at the expense of your pension fund to pass onto your family, let your pension fund do the work.  It’s likely to be far more effective.  Consider this strategy.

Once you’ve reached the grand old age of 55, rather than pull out all your money because you can, draw out what you need to live on.  That’ll minimise your Income Tax bill and leave the majority of your money protected in a tax privileged environment. 

On your death, your pension fund will pass to your beneficiaries with no death tax. It remains tax privileged for them, and only when they make withdrawals will they pay Income Tax at their marginal rates.* Whatever they don’t spend during their lifetimes is available to the people they leave behind.  It’s really efficient generational tax planning.

A Word About Your Home If You View It As An Inheritance

As we get older, it makes sense to downsize to a smaller, more manageable home.  Yet many people hang on to larger, expensive-to-run properties so they have something of value to pass on to their children.  With the impending threat of ‘Mansion Tax’ and the like, the cost of owning property is only going to rise.  This adds uncertainty and reduces inheritance when what most people really should be doing at this time is enjoying life’s longest holiday.

Pound for pound, as you move through your retirement, it’s far more Inheritance Tax efficient to downsize your property and use the net proceeds to live on, leaving your pension fund in tact to pass on tax free to those you care most about.

What’s interesting is that any property owned directly by your pension fund won’t have to be sold on your death to pay Inheritance Tax.

While we’re on the subject of protecting your inheritance, you may be able to prevent your home being sold if you or your spouse has to go into long term care.  Have a look at the video below.  If you want information on all forms of Asset Protection, please send us a message using our contact form.

So What About Those Sound Bites Above?

My Pension Hasn’t Been Performing For Years

If you’re relying on a big insurance company or a former employer to manage your money, isn’t it time to take control of the investment decisions yourself with a SIPP that’s right for you?

I Don’t Take Much Notice Of My Pension As It’s Dead Money

The pension changes last year mean your pension money isn’t dead, for it’s now as valuable and accessible as money sitting in your current account: to prove the point, some pension providers are actually researching ‘pension chequebooks’ or the equivalent!

You Know Where You Are With Property

Property is indeed a great asset to hold for the longer term, so include it within your pension fund so it can pass through several generations, either directly as commercial property, via property-backed loans and investments.

There’s Nothing As Secure As Bricks And Mortar

Property has consistently out-performed inflation over longer periods, so as your pension should now be viewed as a long term generational inheritance, it’s significantly more efficient to hold property within your SIPP rather than outside of it, where it’s exposed to all forms of taxation.

Beware Of Anyone Pushing Property For Pensions

Whenever there’s change, those with a vested interest can be a little “economical with the truth”, as then-Cabinet Secretary Robert Armstrong said during the Spycatcher trial in 1986. 

Unfortunately, there are currently all sorts of property people advising the less informed of us to rip out their pension fund money to reinvest in property.  If you’re approached by anyone offering you such an opportunity, ask them to justify the numbers with a detailed tax comparison showing how their offer compares to leaving the money in your pension.  I bet you’ll soon see them skulk back into the shadows.

Don’t get me wrong.  Property is a great investment at many levels.  But not when it’s funded at the expense of your tax privileged pension money. 

I reckon ex-Dragon Theo Paphitis said it best... “Why would I spend my children’s inheritance on that?”

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That's our opinion.  Not just because AJ Bell was the first company to offer an online SIPP.  Nor that it's received many prestigious awards.  And not even because the wife of SIPPclub's Founder has an AJ Bell SIPP.  It's because it's one of the most competitive stockmarket SIPPs on the market. 

Over time, charges can wipe out a huge part of your fund.  We like AJ Bell because there are no set-up costs.  If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund.  And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment).  However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.

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* Proposed from the tax year 2016/17. In the tax year 2015/16, a 45 per cent charge will be applied if the whole fund is drawn as a lump sum (marginal tax will be charged on withdrawals).