IFAs must not allow clients in drawdown to fall foul of new tax rules surrounding death benefits, said Andrew Tully, retirement income technical manager at MGM Advantage.
Before the government removed compulsory annuitisation at age 75, the tax on death benefits from undrawn pension funds when death occurred after 75, was 70% (or 82% with IHT). For deaths occurring before 75, the tax was 35%.
Now the tax on death benefits from undrawn pension funds is 55% regardless of what age the investor died.
This means for some clients, the tax liability has fallen from 70% to 55%, but for others who may die before 75, it has actually increased from 35% to 55%, Tully said.
Tully explained IFAs may fall into the trap of leaving clients younger than 75 in drawdown, but should think through that choice.
"Half of people in drawdown used to take their lump sum and leave the rest in their pension. IFAs need to check their drawdown books to ensure they are not letting clients sleepwalk," Tully said.
Tully added some IFAs have "massive" books of aging drawdown business. Since the removal of the requirement to annuitise by age 75, there has been no trigger for them to exit drawdown, thereby exposing them to the tax threat.
"Advisers should look at putting money into a trust or gifting it," Tully said.
"By stripping out a pension fund gradually as income, paying income tax and putting it into a vehicle for beneficiaries, clients can double the money they leave behind as they mitigate tax," Tully said.
He suggested the money from the pension could then be put into a pension for children, a trust or an offshore bond.
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