The wealth management firm Towry considers how a revolution in the UK's pension industry affects estate planning.

The recently-announced changes to UK pensions, giving holders more freedom over how to manage their money and also increasing freedom to transfer pensions as part of their estate, are notable talking points for wealth managers. (See here.)

Ian Dyall, head of estate planning, and Andy James, head of retirement planning, at Towry, the wealth management firm, talk about the estate planning dimension of the changes. As always, while this publication doesn’t necessarily endorse all the opinions of guest contributors, it is grateful for such contributions and invites readers to weigh in with their opinions. To contact the editor, email tom.burroughes@wealthbriefing.com or call +44 207 148 0178

As part of the new pension reforms, your beneficiaries can inherit your pension savings tax free if you die before the age of 75. Even if you die after age 75, the savings will only be taxed at their marginal rate of income tax, and only then if an income is taken from the pension. A tax charge of 45 per cent will apply if benefits are taken as a lump sum, although this is proposed to change from the 2016/17 tax year, when your beneficiary’s marginal rate of income tax will apply. What’s more, the new rules mean that a pension which is passed on can be further inherited upon death by the next nominated successor.

A key decision for you will be deciding what your pension is for. Will you use it to provide a retirement income, or as a method of passing on assets? There is a lot to consider here. While a pension has a variety of benefits, any income is taxable and so it can be more tax efficient for you to draw an income from other sources first, such as from Individual Savings Accounts. Cashing in investments held outside of your ISAs and utilising your annual capital gains tax allowance is another potentially tax-efficient option.

Of course, it can be difficult to know how much of your wealth you are going to need for your lifetime and how much you can afford to leave to others, especially when you first retire. One of the best ways to establish this is to undertake a cash-flow analysis.

This considers all your assets and takes into account what you think you may need in retirement and how much it may cost. If it shows that you have enough with some left over then you can start looking at the best ways to pass assets on to future generations.

One further point on passing on your pension is that this is done through completing an “expression of wish” form, which should be sent to your pension scheme’s trustees, rather than through a will. The advantage of this is that it is much easier and cheaper to amend an expression of wish form, if required, than it is to change a will (or a trust). You should review your expression of wish forms regularly to ensure they remain in line with your requirements, ideally at least annually and also when either your own circumstances or those of your proposed beneficiaries change.

One option you can consider when using an expression of wish form is to nominate a trust rather than one or more individuals. If you choose this option, setting up a suitable trust will involve legal advice and therefore costs, so you will need to be clear as to any advantages this may offer in your own personal circumstances. Also, money invested in the trust is taxed differently, and potentially the investments will be less tax efficient than if the money were to remain in the pension. However, the trust offers greater levels of control rather than simply leaving your pension to someone else.

Once the funds are received by the trust they are in the control of the trustees. The trustees will be those put in place by you to manage and distribute the funds in line with your wishes. This can be very valuable where there would otherwise be concerns about passing funds on directly as the control would then completely rest with the individual receiving the pension.

 Where you would like to ensure that, for example, children from an earlier marriage benefit after the death of a spouse, or where there are potential issues with an impending divorce or bankruptcy of a child, leaving control with trustees can ensure the funds find their way to the right people at the right time.

If you are likely to be leaving pension funds to others in future, then getting advice at an early stage will be the best course of action.