Pension Director Martin Tilley explains why the best time to review pensions is when you are in good health.
For many individuals in their fifties or even sixties a formal review of their pension affairs can wait until they are intending to draw benefits. The funds are suitable and the performance is acceptable, so why the need to change anything now? Putting off, what does not appear urgent can be a familiar trait.
Well, one very good reason exists and that is because good health cannot be guaranteed. This can become a factor in a number of situations.
The 2015 pension freedoms now offer flexibility of benefits at retirement previously unavailable. Phasing of lumps sums and income options which can be varied at a whim are now extremely attractive. The problem is that whilst the newer pension contracts have been designed around the latest legislation, many of the older contracts were not.
These contracts may insist on annuitisation at age 75. Some, like pre 1990’s retirement annuities may insist upon an annuity at date of drawing benefits.
If for any reason health suddenly becomes a factor, even an impaired life or guaranteed annuity is unlikely to offer a suitable outcome as control over investment and the initial capital is lost.
Some of the older retirement annuities still operate archaic death benefits, meaning instead of paying out the full value of the policy on death, the benefit is a return of premiums with minimal interest (Return With Interest) or the even more draconian simple return of premiums (Return No Interest). Although these products are now almost extinct, those still remaining could have an effective loss on death of tens or even hundreds of thousands of pounds.
Even Return of Fund policies, unless written in trust will pour money into the deceased individual’s estate potentially increasing any liability to IHT.
The logical route to avoid these issues is to transfer to a modern pension contract, which accommodates the new pension retirement freedoms. More importantly the new flexible death benefits will be available. The pension fund can deliver tax-efficient and carefully planned retirement income. And with carefully written pension scheme nominations the death benefits can be managed to conserve wealth through many generations.
The problem when an unforeseen health issue occurs, is that a transfer between pension vehicles when the individual is knowingly in poor health can be regarded as a chargeable transfer against the estate even if pension funds were not, or during transfer never fell within the estate. In the recent well publicised case of Staveley vs HMRC, the Revenue’s insistence of pursuing the letter of the law shows that this matter, however unfair in concept, is ripe for taxation.
For this reason, a review at an early age and the placing of retirement funds into a suitable modern vehicle capable of accommodating the most flexible of retirement planning now, whilst the individual is in good health must be a prudent consideration.
Hurley Partners strongly recommends that individuals should seek suitable professional advice regarding the matters referred to in this document, which has been prepared for general interest only. Nothing in this document constitutes advice. Hurley Partners Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 8401891. Registered Office; 12 Conduit Street, Mayfair, London, W1S 2XH. © Hurley Partners Limited 2019