Could it pay off to leave your pension where it is?

Changes to the tax treatment of pension funds on death mean that for some clients the best pension income option might be no income at all.

The overhaul of pension legislation, most of which came into effect in April introduced changes which were so radical in nature that it was difficult to predict just how individuals would look to take advantage of the more flexible rules.

Many industry commentators suggested we would experience a sea-change in the behaviour of individuals at-retirement, while others predicted that when it came to the crunch, retirees would resist the temptation to cash in their pension pots and would simply stick with tried and tested retirement income solutions instead.

A few months into the new regime, we are starting to build a clearer picture of the impact of the reforms on retirement income choices.

Much has been written about the decline in popularity of annuities and the increased use of drawdown pensions for retirement income since April but perhaps the more important question for some clients is not what type of income product to use, but rather whether you should be drawing any income from your pensions at all.

Traditional thinking has been that we save into a pension throughout our working life and then we draw an income from the accumulated fund, by means of an annuity or drawdown pension throughout our retirement. Our ‘other investments’ such as ISAs, unit trusts and investment bonds have often been left as growth investments with, perhaps occasional withdrawals for special holidays, gifts to children and the like.

In April however, legislation came into force meaning that pension funds are now not subject to any tax on death (subject to lifetime allowance limits) whilst also allowing access to income or capital at any stage during life. Pensions are now therefore one of the most effective ways of transferring wealth down through the generations and as such the idea that your pension would be the first place to look for income when you retire needs to be turned on its head. For those clients with other investments and available assets, pensions may now be the last place we advise them to look for income to fund their retirement.

In many cases, by choosing a different source of income at the point of retirement, or by making changes to income sources if already drawing pension benefits, we may now be in a position to be able to save clients many thousands of pounds in income tax. This reorganisation of income can also reduce an individual’s liability to inheritance tax which makes the process even more beneficial for themselves and for their family.

Professional advice from an appropriately qualified adviser will ensure that you are making the pension freedoms work for you and your family in the most efficient way.


If you think this might impact you or someone you know and would like to discuss your specific circumstances, please speak to Kevin Hilton Or – 01904 464 100