Pension Freedoms Boost For Family Fortunes

08 October 2015

  • One in four couples plan to use new rules to leave an inheritance to families
  • One in six will use freedoms to make financial gifts to their family
  • But 33 per cent of couples are concerned that they may run out of money in retirement

A quarter (25 per cent) of couples plan to take advantage of pension freedoms to make sure they leave an inheritance to their families, according to new research1 from Prudential. The findings from the insurer’s annual study into financial attitudes and retirement planning among couples aged 40-plus are released as the pension freedom reforms turn six months old.

While much attention has focused on the freedom to access pension pots, one of the lesser known changes that came into effect in April 2015 simplifies the rules regarding individuals passing on unused pension savings to a nominated beneficiary when they die. The changes mean that unused defined contribution pensions can now be passed on without a penal tax charge that would have applied to many cases prior to this April2.

However, many couples have decided that they want to pass on cash from their pension savings sooner so that their families don’t have to wait for an inheritance. One in six (16 percent) couples plan to use the new rules to give money to their families to help them buy a
new home, pay for education, or simply to fund a luxury they wouldn’t usually be able to afford.

In light of the freedoms to access pension savings, Prudential also asked couples to list their priorities for any money they plan to take from their pot in the first year of retirement. The most popular response was taking a holiday (26 per cent), followed by paying off debts
(25 per cent) and home improvements (17 per cent). One in six said that their priority was to seek financial advice before making any decisions.

The advent of pension freedoms has also seen new concerns develop among those planning for their retirement. The research found that top of this list of concerns was a worry, among 33 per cent of couples, that they could run out of money in retirement. Other post pension freedoms concerns include making mistakes in retirement planning (15 per cent), making decisions that will lead to unnecessary tax bills (13 per cent), being faced with too many retirement income choices (nine per cent) and falling victim to fraudsters (seven per cent).

Vince Smith-Hughes, retirement income expert at Prudential, said: “It’s good to see that, six months in, the pension freedom reforms are encouraging couples to stop and think about their financial priorities in later life. These figures show that for many people there is balance to be struck between passing money onto their family and funding their own retirement.

“For many couples we spoke to retirement is still a long way off – our previous research has shown a growing trend for people to work well beyond what have traditionally been seen as the standard retirement ages. With this in mind it’s never too late to start saving as much as possible to boost your pension pot to ensure that you and your family are as comfortable as possible in the years to come.

“Of course with freedoms come a wider range of choices for pension savers. For most people a consultation with a professional financial adviser will help make the most of these choices, and for those with defined contribution pension savings aged 50 or over the Government’s free and impartial Pension Wise service offers valuable guidance.”

Under the pension freedoms that came into force in April 2015 individuals now have the freedom to pass on their unused defined contribution pension to any nominated beneficiary when they die without paying the 55 per cent tax charge previously applied to pensions passed on at death. If the individual dies before they reach the age of 75, they will be able to give their remaining defined contribution pension to anyone as a lump sum completely tax free, if it is in a drawdown account or unvested.

However, perhaps the most radical change that has come about with the pension rule changes is the ability for over-55s to convert their pension pot into a cash lump sum, 25 percent of which is tax free with the remainder taxable at an individual’s marginal rate3.

Notes to editors

1 Research conducted by Consumer Intelligence on behalf of Prudential between 7 July and 17 July 2015 among 1,019 UK adults aged 40-plus who currently live with their spouse or partner.

2 https://www.gov.uk/government/news/chancellor-abolishes-55-tax-on-pension-funds-at-death

3 https://www.pensionwise.gov.uk/take-whole-pot

Media contacts

Ben Davies

020 7004 8082
ben.davies@prudential.co.uk

Louise Bryans

020 7004 8280

Louise.Bryans@prudential.co.uk