Pension Freedoms or Investment Management Conundrums?
There is no doubt that the new flexible rules given to defined contribution registered pension schemes from 6 April 2015 have been welcomed by many investment advisers and their clients.
However, these amendments potentially create a change in emphasis on the use of accrued funds. A lot of discussion has focused on the client’s ability to gain access to their full pension pot at any point after the age of 55, or to have a great deal more flexibility in the level of withdrawals that can be made each year. For many of those with larger sums invested though, the use of another change could be equally or perhaps even more important.
Since 6 April 2015, it has also been possible to pass a defined contribution fund on death to nominated beneficiaries (who now don’t even have to be financially dependent on the member) through generations without any liability to tax. This is regardless of the option that the client has chosen in respect of either taking or not taking retirement benefits. Tax at 45% is currently payable where the deceased is over 75 years of age, if the fund is paid as a lump sum. This liability can be avoided by passing the fund to beneficiaries who use it to take income drawdown. In such circumstances, income tax may only be payable if the beneficiaries withdraw amounts from the fund. Even then, no tax would be payable if the income falls within their personal income tax allowances. The rules are thus a lot more flexible and HMRC appear less greedy than before April 2015.
So what does this mean for investment managers advising or running the portfolio of a defined contribution fund such as a Self Invested Personal Pension (SIPP) on a discretionary basis?
At the very least, the client’s situation should be reviewed as soon as possible. They need to understand what their options are and how these fit with their objectives and the use of alternative assets and income.
For instance, an individual with other investments may now wish to re-position their pension fund and use it as a succession planning tool. In this case, there would often be a desire to maximize its growth potential and possibly upscale the level of risk being taken, resulting in the need to rebalance the portfolio of assets within the arrangement. In these circumstances, it would be no surprise to see the client wanting to contribute further amounts in accordance with their available annual allowance (up to £40,000 per annum). The investment manager should therefore allow for a constant inflow of potentially large sums into the overall portfolio strategy.
Of course, where a client decides to take this route, they may want an income from elsewhere once benefits start to be drawn. Investment managers should also re-balance portfolios being managed outside the pension fund, to accommodate immediate cash requirements and a longer-term income stream. This should ideally be done by using tax efficient wrappers where available and appropriate, such as ISAs, or VCTs, if they are likely to fall into their chargeable estate on death for inheritance tax purposes. It would also be advisable to consider using other resources that may get caught but which could release funds from which to draw an income such as the individual’s principal private residence if say, they wish to trade down.
Even where a client wants to retain a registered pension fund as a primary income source in retirement, investment managers still need to review their portfolios to ascertain how any of the new benefit options and their intended use will affect the balance of the portfolio.
To summarise this, investment managers and advisers alike need to re-appraise all their clients with pension funds that may be directly affected by the recent rule changes. This should be done in terms of their objectives and also with regards to the sources they are likely to use to provide cash and income in retirement, alongside any succession planning on death.