There have been a number of articles in the media recently about pension and tax issues.

Here’s what’s been reported, along with our Deborah’s take on them:

 

 

Use pensions to beat inheritance tax
Pensions can help you avoid inheritance tax bills, says the Mail. If you have a defined contribution pension plan, its value on your death is free from inheritance tax and can be left to anyone you choose. If you die before the age of 75, the beneficiaries don’t pay any tax either. And though they are in theory liable to income tax on a bequest of a pension if you die after the age of 75, many can avoid this – grandchildren, for example, will probably have no income and pay no tax, but still have their own personal tax allowance of £11,500 and could withdraw this amount each year without incurring any tax liability.

Deborah says:”But this only works if you tell your pension company. It’s very important that you complete a nomination of beneficiaries or expression of wishes and remember to keep it up to date!”

HMRC’s auto-tax experiment
Between now and Christmas, some 400,000 people who normally complete a tax return will instead receive in the post from HMRC a ‘simple assessment form’, already pre-filled using data held by the taxman. The forms are going to two groups of people: new state pensioners whose income is above the personal allowance and PAYE taxpayers – most employed people – who have underpaid tax by a significant amount, perhaps because they enjoy a workplace benefit on which further tax is due. HMRC hopes people will just agree the figures and pay the tax. But experts warned that the error rate could be 10% or more and urged people to check the figures carefully.

Deborah says:”This is a great idea to simplify that horrible job of completing the tax return, but it’s important to check that the figures are right and that nothing is missing. It’s always your responsibility to make sure your tax return is correct.”

How to boost pension tax-free cash
Switching from a final salary pension to an independent plan could substantially boost the amount of tax-free cash you can take, says the Telegraph. Under a typical final salary scheme rules, the fund is valued at 20 times the pension, so if you had a £10,000 pension entitlement the fund would be worth £200,000 and you could take a quarter of that or £50,000 as tax-free cash. But many schemes now offer much higher transfer values of up to 40 times the annual pension, and if you transferred at that valuation your tax-free cash entitlement would be £100,000. But, warns the Telegraph, it remains a risky thing to do since you are giving up irreplaceable lifetime pension guarantees.

Deborah says:”Transferring a pension is much more complicated than this article implies. There are so many factors to take into account, not just how much cash you could get now, but what income you would then have to live on for the rest of your life. And that is often longer than we think – a 65 year old could expect to live to at least 85, but if you don’t want to have nothing left then you should plan on getting well into your 90s. It’s always essential to get financial advice from a qualified adviser before you do anything.”