From speaking to advisers about this over the years, most tend to come down on the side of drawing income from an Isa and not touching the pension. However, specific advice will depend on the client’s unique circumstances.
My team had a recent enquiry where a wealthy individual, who had an estate that would be subject to a substantial inheritance tax charge, was not unduly concerned about the tax efficiency of passing on their pension. The simple reason for this was that they had no children and the beneficiaries were going to be nieces, nephews, and a few charities. In those cases, all things being equal, there is no reason a client should not dip into their pension if they wish to.
However, in other situations where individuals who hold other investments such as general investment accounts, investment bonds (either onshore or offshore) or Isas, then the consensus is that it can be more effective to meet income needs from these wrappers first, and not touch the pension.
Apart from the tax efficiency of drawing down on these wrappers, for example through the use of capital gains tax allowances, 5 per cent withdrawals and tax-free withdrawals from an Isa, the possibility of passing on the pension fund to a beneficiary is lingering in the background. If the pension member died under the age of 75 then the death benefits may be totally tax free in the hands of the beneficiary, so then retaining as much as possible in the pension wrapper becomes even more apparent in such scenarios.
6. Tackling tax
No client wants to see HM Revenue & Customs swipe away chunks of their retirement wealth, particularly when it comes to the much-hated IHT. Without the right approach, the likes of lifetime allowance and annual allowance can trigger large tax bills that eat into income expectations.
Advisers have a lot of balls to juggle when clients look to them to meet all their retirement goals, while minimising their tax bill, and to do so they need to keep on top of all of the changing legislation.
While there has not been many changes to tax legislation over the past few years, big changes to IHT and CGT are likely, and advisers and platforms must prepare for the inevitable tax consequences of the Covid-19 pandemic.
Tax rises are unlikely to come into play until the next parliament. The delay is down to two factors: giving the economy a chance to recover and the cost of borrowing is currently low. Advisers may want to turn to tax and technical specialists to help cut through any complex changes made by the government in order to help protect their client’s retirement strategy.
One thing we do know is that these types of changes can bring opportunities or sometimes be the death knell to financial products. If any products are suddenly restricted or removed, advisers will need to react and will be looking to the platforms and Sipp providers with the widest range of tax wrapper to help stabilise their client’s portfolio and ensure their retirement stays on track.