Q. I am 30 and my company has just introduced a pension under the auto-enrolment requirements. Do I need to start thinking of pension saving yet or should I just save using the Lifetime ISA?

A. There has been much press coverage around Millennials opting out of Compulsory Workplace Pensions with a view to relying on the new Lifetime ISA. The launch of the Lifetime ISA is an unfortunate distraction to the good work that introducing Compulsory Workplace Pensions has achieved. Whilst the Lifetime ISA might look flexible and appealing, the BIG thing everyone seems to be missing is that Lifetime ISA’s do not include any employer contribution element.

For every £80 you pay into a Lifetime ISA the government adds £20 = £100.

Assuming you are in Matched Contribution Workplace Pension, for every £80 you pay in the government adds at least £20 (more if you are a higher rate tax payer) and your employer adds a further £100 = £200.

Given these two products are in effect savings plans and given the new flexibilities with pensions, it does not take a genius or a mathematician to work out that Matched Contribution Workplace Pensions will produce at least twice as much in savings and therefore are more suitable for retirement planning purposes.

In addition, the maximum annual and lifetime limits on Lifetime ISA’s are far below that allowed for pensions and quite simply would not be sufficient for a reasonable retirement.

Lifetime ISA’s are not yet available and it is not unknown for proposed legislation to change or disappear altogether.

My advice would be to stick with your workplace pension, assuming you can afford to do so.

Q. I have read that you can now pass down your pension funds to your family and as I am 75 in three years, I think it’s about time I put these in place. Are you allowed to nominate more than one person and is there anything I should bear in mind when arranging this?

A. The ability to pass pension funds on as a lump sum in the event of death before retirement has been available for many years, but the various taxes applicable to death benefits after retirement meant that there was little attraction in retaining funds for beneficiaries after the age of 75. However, changes introduced at the same time as the new pension flexibilities in 2015 mean that pension funds can now be left either as a lump sum or as a pension fund, subject to income tax on the recipient, or recipients, as it is possible to nominate more than one beneficiary. Should you die prior to age 75 there would be no tax liability at all for any beneficiaries, regardless of their personal tax status.

If the pension fund is passed on as a lump sum after age 75, this can often push the beneficiary into a higher tax bracket, taking a significant chunk out of the pension. However, if the pension is drawn as income, then this can be drip fed out to avoid incurring a higher tax liability.

Unfortunately, not all providers have the systems to fully embrace the new options, and some are only able to offer lump sum death benefits, potentially delivering a significant tax bill to your beneficiaries. Furthermore, even if the provider offers the ability to pay benefits as an income to a beneficiary who is not financially dependant, they can only do so if you have informed them of your wishes for this to happen in the correct way.

This is an area where some simple steps can save significant amounts of tax for your beneficiaries, and it is also worthwhile positioning your fund while you are in good health. While pensions are usually exempt from inheritance tax, a “deathbed” transfer between providers can also put this exemption at risk. It is important to take good advice from a chartered financial planner with knowledge of the rules in this situation.

 

If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.