Five pitfalls of pension freedoms

0
Written by: YourMoney.com
29/03/2016
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. 
  1. 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 .

  1. 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?

  1. 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.

  1. 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.

  1. 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.

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Could you make a Dieselgate claim?

An estimated 500,000 Mercedes-Benz owners could each be eligible to claim compensation of up to £96,000.
Could you make a Dieselgate claim?

Parcel delivery scam warning

UK Finance has warned consumers to look out for criminals posing as parcel delivery companies.
Parcel delivery scam warning

Claim a year’s worth of WFH tax relief – for one day working at home

Employed workers who work from home can apply for tax relief to offset the extra electricity and heating expen...
Claim a year’s worth of WFH tax relief – for one day working at home

Ryanair jetting towards US flights for £10

Ryanair is on course to achieve its long-held ambition of offering transatlantic flights to the US – and the...

Investing in car parks: a good vehicle for income seekers?

As the search for income continues, many investors are turning to alternatives, with car parks becoming increa...

A quick guide to guarantor loans – in association with Guarantor Loan Comparison

Considering a guarantor loan or becoming a guarantor yourself? Read our essential guide...

Results round-up: Companies to watch this week

Mulberry and more will face the music this week.

Product launches of the week

Select Property Group, Schroders, Leeds Building Society and more have exciting news this week.

Money Tips of the Week

Read previous post:
Virgin money, sustainable dividends
Fund manager tips: five companies paying sustainable dividends

Income seeking investors have felt the pressure this year following a raft of dividend cuts by big-name companies.

Close