In a few months, the minimum age for drawing a pension will rise from 50 to 55. This change will come as a shock to some people who were anticipating accessing some or all of their savings before their 55th birthday.
But you can take action to help people make plans in advance of these changes. One interesting option may involve recycling income for the benefit of the client or their relatives.
The minimum retirement age increases overnight with effect from 6 April next year. For example, someone born on 7 April 1960 could have started drawing their pension from their 50th birthday on 7 April 2010 before these changes were introduced. Now, they will have to wait until 7 April 2015 – their 55th birthday – before they can touch their pension.
Those who will be aged between 50 and 55 next April can choose to take some or all of their benefits before the rules change. But, once we reach 6 April, no further amounts can be taken into payment until the individual reaches their 55th birthday. So its important advisers and clients consider income needs in advance of this date, to ascertain how much income is, or may be, needed over the next few years – perhaps bringing forward any withdrawals that they planned to take between 6 April 2010 and their 55th birthday.
In truth, few people can afford to retire completely on their 50th birthday, but as more and more people gradually ease into retirement some would like to access part of their pension. The current economic climate is another reason why some people may want to use some of their lump sum or income to supplement their standard of living.
For those people who may be unsure of their plans, taking some income with a view to reinvesting it may be an option of interest. Let’s be clear – there are no laws against reinvesting pension income. It is a legitimate strategy to help meet financial planning goals. For example, people may want to reinvest unneeded pension income back into their pension, or into pensions or trusts set up for partners, children or grandchildren.
Some advisers may have a niggling doubt that clients may fall foul of the Revenue’s lump sum anti-recycling rules. It’s important to consider this as part of the advice process, but also to keep it in perspective. Looking at a clear cut situation, the lump sum anti-recycling rules can never apply where someone reinvests their pension income into a pension arrangement for someone else (such as the individual’s spouse, child or grandchild), or a vehicle that is not a pension, for example a trust.
It is less clear cut where someone reinvests pension income back into their own pension but, even here, the lump sum anti-recycling rules should rarely be a barrier. For those paying into their pension on a regular basis, an issue will only arise where they plan in advance to effectively live off their tax-free lump sum to facilitate the income reinvestment – as to all intents and purposes they are recycling their lump sum in stages.
So, there are a few things to consider when discussing the action clients take before the changes come in next April. The flexibility and fantastic estate planning benefits of recycling income for the benefit of family members mean it is an opportunity that should not be overlooked.
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