Financial and Tax Insights

Your Year-End Tax Planning. Part 4.

Pensions and ISAs

Pensions

The lifetime allowance is £1,073,100 for 2020/21 and is likely to increase in line with inflation in subsequent tax years. Certain taxpayers who have already funded their pension plans on the basis of the previous lifetime limits had the opportunity to apply for fixed protection to fix their lifetime allowance to such previous limits.

Applying for fixed protection means you will no longer be able to make any further contributions to your pension plans. If that is so, negotiation with your employer may be necessary to obtain a salary replacement in lieu of pension contributions.

Taking benefits from your pension scheme

Individuals can take income from their pension fund with no restrictions as to the amount withdrawn or the timings of those withdrawals, normally from 55 years of age. Taken to the extreme, you could take out the entirety of your pension scheme albeit at the expense of income tax at your marginal tax rate on the funds withdrawn in excess of the tax free lump sum.

The 25% tax free lump sum is well known, but under the new rules, you can continue to take the lump sum up front when first drawing benefits from your pension fund, or alternatively you can take 25% of every payment tax free, with the remainder being taxed at your marginal tax rate.

Taking benefits from the pension scheme of those who have passed away

Certain lump sum payments from such pension funds can be made advantageously. The payment has to be made within two years of the individual’s death and be within the lifetime allowance. Where the deceased was aged 75 years or over, the beneficiary of their pension scheme will pay tax at their marginal rate of income tax as they draw money from the pension fund. If the deceased was under 75 years of age, no income tax is payable by the beneficiary of their pension fund and in effect the pension fund can be withdrawn tax free.

As an alternative, the lump sum payment can be paid tax free to a discretionary trust, sometimes referred to as a spousal bypass trust, to maintain flexibility within a family as to who benefits from the deceased’s pension fund.

Individual Savings Accounts (ISAs)

The government’s intention remains that ISAs should be your main savings vehicle with all income and capital gains escaping the charge to income tax and capital gains.

If you subscribe to the maximum annual allowance each year, you should accumulate a substantial investment fund over your lifetime. This will help sustain your lifestyle in retirement and can help fund expenditure during your working career.

Normal ISA savings limit

In 2020/21 the overall ISA savings limit is £20,000.

Transferrable ISAs on death

The surviving spouse or civil partner will benefit from an allowance up to the value of their deceased spouse or civil partner’s ISA savings at the date of their death. This will be in addition to their normal ISA savings limit.

In some cases, this will represent a great opportunity to reduce income tax and capital gains tax liabilities by keeping a significant asset base in a tax efficient structure.

Funds within the deceased’s ISA will remain exempt from income tax and capital gains during the administration period such that there will be no tax change on income or gains to either executors or beneficiaries.

Lifetime allowance