Financial advisers are paying more attention to tax planning as a direct result of the pension freedoms, with one in particular urging people to consider using trusts to mitigate inheritance tax.
At a Prudential and Unbiased tax action roundtable held this morning (19 May), a survey conducted by Opinium Research amongst 2,003 UK adults showed that £550m is set to be wasted in inheritance tax payments this year, with individuals not taking appropriate action, such as placing life protection policies under trust.
When asked if advisers had changed their tax planning as a result of the new pension freedoms, advisers present agreed that they had.
Alistair Cunningham, financial planning director at Wingate Financial Planning, said: “Pension freedoms is significant, not because the rules have changed from how you get money out, but the lump sum death benefits on pensions are now for most people, anyone drawing an income from a pension under the age of 75 the death benefits are improved.
“So inheritance tax planning, stuff that costs you very little, can actually have a massive impact. If you have got a half a million pound pension fund, whether you are now drawing from it or not, if you are under the age of 75 you should have a separate trust.”
Mr Cunningham explained that client should have a trust so that if one partner dies, and the money is transferred to the other partner, then when the other partner dies there will be a £200,000 tax bill.
“It’s very straightforward for that money to go into a trust which the second partner has access to - there’s no IHT on the first death but what you’ve effectively done is avoid £200,000 tax.”
He added that this would cost between £300 and £1,000 at the most.
“I would say it [trusts] is one of those things that people are probably scared of, the skill in being a good financial planner is making it really simple.”
Tom Dean, a chartered financial planner at Plutus Wealth Management, flagged up that there is a big difference between a trust for pensions, a trust for life insurance policies, and putting investments into trusts.
Paul Fidell, head of business development for investments at Prudential, added: “Trusts theoretically pre-date tax for a number of years, and the concept of the trust fund applies to whatever you put into is all about arranging things to be transferred to somebody else in the right way at the right time.”
Mr Cunningham delineated the three main reasons for using trusts. The first, which he said is the simplest, is where you want your spouse to be able to benefit from something like a lump sum death benefit from a pension or a policy but it not be a part of their estate.
The second is where you want to protect assets, for example having a trust in your will to prevent children getting access to assets before a certain age. The third is pure tax planning, going into a trust and restricting your return for some sort of IHT saving.