How to navigate the pensions tax landscape since freedoms

  • List what changes in the tax landscape mean for clients in decumulation.
  • Identify why retirement is changing.
  • Describe why annuities are still an option for clients.

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.

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.

At age 75, tax legislation under benefit crystallisation event 5 (BCE 5 for DB and BCE 5B for DC) imposes an LTA test on uncrystallised entitlements, whether or not the pension scheme and lump sum entitlements come into payment at that time.

And for those already in drawdown, BCE 5A tests the increase in their drawdown pot size against any LTA left unused when drawdown commenced. So, this could mean that clients face a 25 per cent tax charge on any savings over the LTA at this point – not a great birthday present.

It may be wise therefore to ensure that your clients are not right on the LTA threshold as they approach age 75. In view of this, it is worth encouraging clients to reduce the size of their overall pots in the run up to it. As a minimum they should take all income from investment gains.

This may run contrary to some advisers’ thinking on keeping as much income invested for as long as possible, but it makes sense in view of the fact that more and more of us will be living to a ripe old age.