Year End Pension Planning & Savings

In this, our fourth article about end of year tax planning, we take a look at pension planning and savings. With the end of the financial year only a few weeks away, now is the time to review your financial and taxation position to ensure your planning is still on track and to take advantage of any opportunities.  

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Individuals can take income from their pension fund with no restrictions as to the amount withdrawn or the timings of those withdrawals, normally from 55 years of age (with a planned increase to age 57 on 6 April 2028).  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take out the entirety of your pension scheme albeit at the expense of income tax at your marginal tax rate on the funds withdrawn in excess of the tax-free lump sum.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.  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. 

The lump sum allowance is a person’s maximum cumulative tax-free lump sum they can receive, and is the amount of £268,275, being 25% of the former Lifetime Allowance, or if less, 25% of the value of your pension fund.

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.  

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years of age, no income tax is payable by the beneficiary of their pension fund and in effect the pension fund can be withdrawn tax free.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. 

Unused pension funds and death benefits

The government will bring unused pension funds and death benefits payable from a pension into a person’s estate for inheritance tax purposes from 6 April 2027.

The exemption between spouses and civil partners will apply avoiding a tax charge on the first to pass away.  But thereafter, regardless of whether you die before or after age 75, your unused pension fund will be subject to inheritance tax.

There are a number of strategies to address this future imposition of inheritance tax.

Individual Savings Accounts (ISAs)

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

If you subscribe to the maximum annual allowance each year, you could accumulate a substantial investment fund over your lifetime, usually approaching £1 million in value.  This will help sustain your lifestyle in retirement and can help fund expenditure during your working career.

Normal ISA savings limit

In 2024/25 the overall ISA savings limit remains at £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 tax during the administration period such that there will be no tax change on income or gains to either executors or beneficiaries.

Tax Efficient Investments

There are a number of tax efficient investment schemes. 

Enterprise Investment Scheme (EIS)

EIS gives you tax relief for investing in new shares in qualifying unquoted trading companies.  The tax incentives for investing in companies qualifying for EIS relief are intended to compensate for the high risk of failure.

The tax reliefs are:

• EIS income tax relief at 30% on up to £1million invested provided the shares are held for at least three years
• This limit increases to £2 million if at least £1 million of that is invested in “knowledge intensive” companies
• The possibility of carrying back the tax relief to the previous tax year
• Further tax relief if the investment is disposed of at a loss or the company fails
• Capital gains on EIS qualifying shares escape capital gains tax if the investment is held for three years
• Capital gains of any size from the disposal of any assets can be deferred by reinvesting into EIS qualifying shares, providing reinvestment is made in the period one year before and three years after the date of disposal - the gains deferred become chargeable when the shares which qualify for EIS relief are sold.

In a climate of increasing tax rates, you will need to consider whether it is in your best interests to defer a capital gain to a later tax year when an increased tax rate might apply.

Seed Enterprise Investment Scheme (SEIS)

SEIS was introduced for shares issued in small start-up companies less than two years old. 

The tax reliefs for individuals are:

• SEIS income tax relief at 50% on amounts invested up to £200,000 provided the shares are held for at least three years
• The possibility of carrying back the tax relief to the previous tax year
• Capital gains on SEIS investments escape capital gains tax if the investment is held for three years
• Further tax relief if the investment is disposed of at a loss or the company fails
• Capital gains on the disposal of any asset can be made 50% exempt by reinvesting the gain in qualifying SEIS shares provided the investment is made in the same tax year as the disposal. 

The potential for 50% tax relief (or up to 78% tax relief if you have realised capital gains in the current year) should make SEIS attractive to individuals who wish to back potentially high growth businesses in the UK.

Venture Capital Trusts (VCTs)

VCTs are quoted investment trusts that invest in a range of small trading companies.

The tax reliefs are:

• Income tax relief at 30% on up to £200,000 invested in a tax year
• No capital gains tax on disposal of the shares in a VCT if the shares are retained for five years
• Dividends are tax free.

The tax incentives are again intended to compensate for the high risk of failure.  

Community Investment Tax Relief (CITR)

CITR is designed to encourage private individuals to invest in accredited Community Development Finance Institutions.  The amount invested attracts income tax relief at the rate of 5% per annum of the amount invested for five years, giving in total tax relief of 25%.

Investment risks 

It is important to remember that investments that qualify for EIS, SEIS, VCTs and CITR are all high risk, highly illiquid and difficult to realise other than in accordance with the intended exit route, if indeed one is available or permitted at the time of investment.

We hope you have found the suggestions above helpful. You can find our previous article about end of year planning here: Inheritance tax and estate planning.

In our next article in this series, we will be looking at tax efficient ways to help your family.  As always, please contact us to discuss your circumstances with you.

These articles have been written to provide a general guide to potentially highly complex issues. Whilst great care has been taken in the production of these articles, they are intended to provide the clients and friends of Ritchie Phillips LLP with an outline of the issues individuals, families and trustees should consider and you should seek specific advice before taking or refraining from any action.