Michael Galway, director at Mattioli Woods, discusses how small self-administered pension schemes (SSAS) can now be used to pass wealth down through the generations, tax efficiently.
The past 18 months have been a busy (and positive!) time for pensions. Much of the press attention has focussed on the introduction of the new ‘pension freedoms’, which allow individuals to have unrestricted access to their pension pots from age 55.
However, perhaps the most beneficial change has been to the tax treatment of pensions on death, whereby any undrawn pension assets (including commercial property and land) can now be passed onto children and grandchildren, without inheritance tax – and potentially without any tax implications whatsoever.
As pension assets are held outside the members’ estate, they are not subject to inheritance tax when passed onto the next generation. Previously, any benefits left to children (or grandchildren) on death after the member had gone into ‘drawdown’, would have been taxed at 55 per cent.
However, from 6 April 2015, on death before age 75 (whether the member has drawn benefits or not), any remaining pension assets can either be distributed as a tax-free lump sum, or as tax-free income. In the latter case, the inherited pension assets can be retained within the pension trust – where all income and gains can continue to be sheltered from tax – until they are required by the beneficiary, when they can then be drawn tax-free.
While the assets are retained within the scheme, they will also be sheltered from inheritance tax on the death of the beneficiary – who can in turn nominate ‘successors’ to receive any remaining pension assets on their demise. As such, the pension fund can now effectively act as a family trust, allowing undrawn wealth to be cascaded down through the generations – with no tax implications whatsoever, where death occurs pre age 75.
On death post age 75, the same principles still apply – the beneficiary will simply pay income tax (at their own marginal rate) on any income or lump sums taken.
All of this assumes that the rules of your pension fund are flexible enough to enable the assets to be passed onto the next (and subsequent) generations. For more information on how a SSAS can provide this additional flexibility, please contact Mattioli Woods on 02890376970 or email ssas@mattioliwoods.com
Northern Ireland’s only independent firm of dedicated SSAS consultants offering business owners bespoke retirement solutions.
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