How to navigate the pensions tax landscape since freedoms

The LTA charge can apply in either of two ways or a combination of both depending on how the excess benefits are taken. The charge is: 25 per cent of any income taken, and 55 per cent if taken as a lump sum.

Take another look at annuities

I mentioned earlier that only about one-in-10 DC pension holding retirees are currently buying annuities. Many advisers are still steering clients away from buying annuities post-pension freedoms, often because they think annuity rates are so poor. However, it is worth looking again.

Recent data from Moneyfacts shows the average annual annuity income rose by between 1.4 per cent and 4.8 per cent in the first half of 2018. So, it is up 14.6 per cent since the EU referendum vote back in June 2016 and now sits just 1.2 per cent lower than when freedoms came in the year before that.

Not only have core rates began to bounce back up, but advisers need to consider that it is increasingly likely there will be two pension holders in many of your clients’ households. So, you can afford for at least one of a married couple’s pensions to be used to buy a single life annuity with no additional death benefits.

And if you do not link the annuity to inflation either (historically people spend slightly less each year after the first three years of full retirement anyway) then the annuity being offered can start to look quite generous. 

I took a look at what the Money Advice Service’s annuity comparison tool offered for someone aged 66 at retirement, in moderate health and living in East London with £100,000 in retirement savings to spend on an annuity. It showed that even for those buying at state pension age, the annuity yields around 5.6 per cent.

It may be wise therefore to ensure that your clients are not right on the LTA threshold as they approach age 75.

Finally, it is increasingly likely that you will be looking after clients that are approaching their 75th birthday – 75 is not that old these days and some may only just have fully-retired by then. Pre-freedoms you used to have to buy your annuity before age 75.

Now there is a different kind of cliff-edge on that birthday, in the sense that on death before age 75 any pension benefits can be paid as a lump sum or as a drawdown pension to any beneficiary tax-free, irrespective of whether they derived from uncrystallised or crystallised monies. But on death after age 75, any benefits will be taxable.