Since 2015, there has been a great deal of discussion about consumers cashing in their pensions and living on the bread line throughout retirement. This may well be the case for those with smaller pots but those that have saved significant amounts both in and outside their pensions will be looking at the funds in a completely different way.
In these cases, conversations with advisers will not necessarily be about how and when to access their pensions but more about what other assets to rely on to preserve the benefits for future generations.
A benefit for advisers will be the need to deal with a client’s family sooner rather than later. The family, especially those set to benefit, will need to be fully aware of the wishes of the client on their death and what is planned.
In most cases, the pension will be passed to the beneficiary on death and it will be up to them to decide whether they take income from it or take it as a lump sum. The original member may have strong feelings about how this should be dealt with once they have gone and will want to communicate this.
With the funds remaining invested, there may also come a time where a power of attorney will be appointed. The adviser will need to be able to deal with any issues this brings with it.
The larger the pool beneficiaries can be chosen from brings even more opportunities for intergenerational planning, with grandchildren and even great grandchildren being an option, alongside anyone else the client happens to know and like. This can provide greater tax planning opportunities. For example, by passing over higher rate taxpayers in favour of those with little or no income, significant amounts can be saved over the years.
Trusts were initially thought to have had their day in pensions planning when the freedoms came in. All the options on death seemed to rule out the need for them. But this is clearly not the case for everyone. Indeed, there are many great reasons to choose a trust as the beneficiary of death benefits, even if there is an upfront tax charge to do so.
The biggest reasons are that those due to benefit from the cash on the member’s death do not have the capacity to deal with the issues of receiving the funds or the original member simply does not want them to have total control at outset.
In this day and age of step families and second or third marriages, it is just not as clear-cut as it would have been when you were certain where the funds would end up. In cases where certainty is needed, taking the initial 45 per cent tax hit at outset (after age 75) would be worthwhile. This is something that really cannot be discounted from long-term planning.
Because there are so many variables for the payment of death benefits, both in their structure and who they are paid to, keeping options open and choices monitored is key.
There can be issues should a beneficiary predecease the member, for example. There may also be additional children or grandchildren to consider as the years go by, as well as their changing needs as they grow up.
Overall, the freedom and choice regime means money remaining in the pension world for longer, needing ongoing financial and investment advice, which is great for our profession. But it will bring greater challenges, with people living longer even if they are not necessarily healthy for all that time.
The biggest bonus is that where clients’ circumstances change, there are always options to adapt plans to fit. This could be crucial for long-term care, in particular.
Claire Trott is head of pensions strategy at Technical Connection
She will be joining us at Money Marketing Interactive as a speaker on May 18th.