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So what has been our experience since the change in legislation that came about in April 2015 known as ‘freedom and flexibility’? Have we seen many Lamborghinis purchased from pension funds, as described in that ill-fated quotation from Steve Web, the then pensions minister or is the picture entirely different, is it more a Robin Reliant?
We are well aware that in the SIPP and SSAS world we are generally dealing with high net-worth clients and therefore our experiences are within this market group. It should be noted however that the most common instruction we have taken since April 2015 is to stop pension income altogether or reduce it.
We have had many enquiries from individuals who have previously crystallised their funds as to what they can contribute going forward. Clearly if they are in the old capped drawdown system whether drawing income or not they can still pay in up to £40,000 (current annual allowance) subject to any restrictions on earnings. If however they have drawn benefits recently under the new flexi access rules they can only contribute at this level if they have drawn no income. If any income is being drawn flexibly they are restricted to the money purchase annual allowance recently reduced to £4,000
So why have pensions no longer become the prime source of income to this group of individuals?
Consider a typical SSAS client who has been running their own business for many years. As they approach age 55 they may be looking to sell their business and therefore the client we will look at has the following assets:
Personal Assets £1,000,000 (which includes a modest home largely due to the sale of their company)
This client wishes to draw £20,000 gross per annum to top-up other sources of income and effectively dies at age 73, 18 years later. If we do not allow for growth they will have drawn 18 times £20,000 i.e. £360,000.
If we look at the more traditional route.
They would have taken the £360,000 from the pension. This would have left:
£1,000,000 – investments/property
£140,000 – in the pension portfolio.
Therefore, the inheritance tax (IHT) bill would be £270,000 i.e. 40% of £675.000. (£1,000,000-£325,000).
The family would receive £870,000
If we look at what we are seeing trending now and that £20,000 was taken from the personal investments as apposed from the pension this would have left:
£640,000 – investments/property
£500,000 – in pension portfolio
Therefore the inheritance tax bill would be £126,000 i.e. 40% of £315,000 (£640,000 – £325,000)
The family would receive £1,014,000
We can then therefore see that there appears to be a significant benefit on drawing on personal income first as this is in the estate for IHT purposes versus drawing on the pension fund which is outside of the estate for IHT purposes.
It is therefore clear as to why pension funds have not been utilised to purchase Lamborghinis but is being largely left untouched as the last resource for income.
As with all strategies, we would suggest you speak to your professional connections prior to making any decision that may impact on your financial planning.