Money Matters - Flexi-Access Drawdown. "With great power comes great [x]"
After the success of the last five ‘money basics’ articles we are continuing this theme with a series of articles on focused subjects. The next five will be covering the overly complex subject of pensions in a little more detail.
Last time we discussed the world of annuities and how they still can represent some value, this week we’re onto the topic of Drawdown.
So, the real reason that pensions are now awesome is because of the death benefits regime associated.
Previously, when someone comes to us with a big estate, we were considering carve-out trusts (which take 7 years to get the money out of the estate) and business property relief qualifying investments (which take 2 years to get the money death tax free). Nowadays these are much less relevant because of pensions.
As long as you keep the money in dependent’s drawdown there is no tax at the point of inheritance, and you can pass on a dependent’s drawdown contract too, converting it to a successor’s drawdown contract (under current rules). The problem here is that some providers haven’t quite got round to writing their older contracts to make it clear how they can facilitate this.
Additionally, transferring ownership is down to the trustees of the scheme and you may not even need probate to pass on a pension.
So, if you’re lucky enough to be sat on a £1m estate, simply shoving £400K into a pension means no death tax – instantly. It isn’t quite this straightforward as there is a potential trap where you have to wait 2 years, but a good adviser can help you sort it all out.
How does it work?
Well FAD is a contract whereby the income you get is set where you want it – even at £0 a year. You have to invest the money to make sure it is making the returns you need to pay out the income and potentially grow the capital too; which does mean the potential is there for a financial collapse to cause the value to drop suddenly and quickly.
This investment can be in a whole host of things, but not chattels (movable assets) nor residential property.
It does mean that you need to keep the funds and the contract under constant review to make sure your money is invested in a structured and balanced manner and to make sure your investment strategy evolves over time to reflect the changing world and the changing marketplace.
There have been various articles in the press relating to those which have been victims of fraud related to the new freedoms. I would stress that the freedoms are not new, drawdown has been available for over 15 years now, what is new is the level of publicity given to this by the government and the media.
The fraudsters often talk about investing offshore, perhaps even in an offshore pension, and promise to give you the income.
They’ll then transfer the money to their account, after you have signed several disclaimers your old scheme has issued, and the clever ones will send you statements and pay out the higher levels of income promised – with statements that make it look as if your money is growing.
These will often be ‘invested’ in something like African gold mines. They’ll invite you to inspect the facility; but the gold mine owner will be in on the scam.
So they’ll take your hard earned £100K, pay you around £10K a year for 3-4 years and then suddenly disappear without a trace and you’ve got absolutely no protection against this as a consumer.
Even simpler frauds have been people telling their investors to pull all the money out of their pensions and buy some lovely diamonds (that you never see) or some such nonsense.
Drawdown is great, instant IHT reduction, pays no income tax or CGT on assets within it, total control of your money, the ability to take out what you want and when you want…
The downside is that people can often be sucked into things and it really does pay to go and talk to a regulated professional. At least if they get conned you can get some money back from their PI insurer.
Next week we’ll talk a bit more about this annual allowance thing, including the rules that are coming in next year…
Our in house Independent Financial Advisors can help you with all aspects of financial planning including pensions, investments and inheritance tax planning. If you need any legal advice, please contact the Chattertons’ Wealth Management team at your nearest office.