The new pension rules, introduced in April 2015, allow an individual to draw down (withdraw) on any percentage of their pension. Surprisingly there are no restrictions on drawing down 100% of your pensions, leaving you with nothing to live off in retirement. The government has nevertheless given over 55s this power. Although many pension providers do not allow it as the ability to withdraw is not compulsory.
This change has, again, loosened the regulation surrounding pensions. In 2011, 75 year olds were no longer required to transform their pension by purchasing an annuity. This requirement is still in force through many pension provider’s standard contract. The problem with buying an annuity is that it removes your ability to draw down on your pension, thus losing the pension pot and limiting your ability to avoid inheritance tax (IHT).
The culmination of these two points – the ability to draw down on your pension and the requirement to purchase an annuity – has led to an interesting article in the FT. The 7 page article highlights the ethical and tax problems that occur when 55-74 year olds are on life support machines. The reason being, if the 55-74 year old was to survive past the age of 75 it is likely that their pension would be converted into an annuity and is likely to be subject to IHT at 40%. Should the 55-74 year old die before they reach the age of 75 then their nominated beneficiary would take the pension pot tax free.
Not a pleasant thought but, when just under half of the pension pot would end up in the hands of the taxman, switching off the life support machine is a tax efficient measure.
The reason why I was drawn to this article is because of its empathetic quality; what would you do if you were the individual concerned?
If I was the 55-74 year old then I would have taken steps to avoid this difficult decision being made by those with questionable characters. I would have nominated an attorney I trust, using a lasting power of attorney (‘LPA’), to make welfare decisions on my behalf so that the question of switching off the life support machine is not one of tax efficiency.
An LPA is a legal document that gives another, a nominated attorney, the right to make decisions on your behalf should you lack capacity to do so. There are two types of LPA – health and welfare and property and finances – and both require registration before they are in force.