Personal PensionNov 17 2015

Flexi-access drawdown rules causing tax inefficiencies

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Flexi-access drawdown rules causing tax inefficiencies

The rules surrounding beneficiary flexi-access drawdown are overcomplicated and may cause tax inefficiencies, according to the head of pensions technical services at Rowanmoor.

Speaking to FTAdviser, Robert Graves said: “It is a shame that legislation, which requires nominees to be individually named, does not allow for the flexible scope of selecting beneficiaries for flexi-access drawdown as it does for lump sum benefits.”

Under current legislation, trustees of a pension have free reign over who is to inherit the policy upon the death if it is being transferred as a lump sum.

However, if the pension pot is transferred as a beneficiary flexi-access drawdown, priority must go to a dependent or someone that has been nominated by the pension holder, meaning those who inherit may not be able to take advantage of any tax allowances.

Currently, transferred pension pots are taxed as a form of income, so it can be more beneficial to transfer the pension pot to descendents – such as grandchildren – who pay little or no tax.

Mr Graves explained that beneficiary flexi-access drawdown may be a better option, particularly where the member was over the age of 75 when they died as their death benefits are assessable for income tax.

“Paying out a lump sum under these circumstance could see it taxed by as much as 45 per cent, whereas if it is drawn as an income over a number of years, the tax paid can be managed and could potentially be nil or basic rate tax rather than being paid to a beneficiary who is a higher rate tax payer.

“This complexity does highlight the need for financial advisers to fully consider all aspects of succession and tax-planning and to regularly review clients circumstances, particularly on attaining the age of 75.”

However, Capital Financial Markets chartered financial planner Paul Coffin believes the rules should not cause an issue, provided pension holders remain communicative with regards as to their wishes.

“I don’t think that this rule is something that is too complex. All individuals have the right to change their minds as to who they want to nominate and give their money to at any given point.”

lucinda.borrell@ft.com