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Five pitfalls of pension freedoms
As the first anniversary approaches of the pension freedoms, which gave people over 55 unfettered access to their pension pots, Mike Morrison of AJ Bell, looks at some of the pitfalls created by the rules.
- Not nominating your beneficiaries
No excuse for this one because it is easy to avoid but it is likely to be one of the most common mistakes. Everyone must make sure they have nominated their beneficiaries for their pension pot on death. If you don’t, it may be that your fund can only be paid out to a non-dependant beneficiary as a lump sum, not as a regular income. If the death is over the age of 75, payment as a lump sum and not income could create additional tax charges .
- Stripping out funds before a divorce
A pension pot could be one of the most valuable assets that an individual has and on divorce the assets of both parties are likely to be aggregated prior to sharing. Could one party who foresees a divorce on the horizon seek to spend some of their pension to avoid it being included in any legal arrangements?
- Spending the pension of a minor
Consider an acrimonious divorce where on death of a pension holder the fund is passed to a minor – it could just happen that the guardian of the minor is the other half of the divorced couple. Care will be needed to control whether that money is actually spent solely for, or on behalf of, the children rather than lavish holidays for the rest of the family.
- Transferring schemes when in ill health
Pension freedoms have led to an increase in pension transfers as people move to consolidate into a plan that offers the new pension freedoms. However, if you make a transfer whilst in ill health and die within two years, then it could be that HMRC assesses your pension for Inheritance Tax.
- Ongoing family disputes
Consider a situation where a father or mother decides to discuss their pension options with their adult children – they have a defined benefit pension scheme with a pension of say £40,000 per annum or an equivalent transfer value say £1.5 million. The parent thinks that he/she would like the secure pension but the children would like them to transfer as they would be likely to benefit from any remaining fund on the parent’s death. Immediately you have the recipe for a family dispute even though the parent should have the final decision.
