To crystallise or not to crystallise, that is the question?Dec 17th, 2018
6th April 2015 was a significant day in financial services history, as it marked the start of ‘pension freedoms’.
Pension freedoms brought about many positive changes to the way in which personal pension benefits are accessed, facilitating a more flexible approach in order to meet variable income and/or capital needs in retirement, as well as a useful inheritance tax planning vehicle. So much so, that for non-Personal Injury clients, pension plans are often the last savings ‘pot’ to be drawn from, it being often preferable to exhaust cash, bonds and ISAs before pensions, leaving the latter largely intact so that they can ‘cascade’ down the generations, where appropriate.
For many PI clients however, the decision to access (or crystallise) an existing personal pension plan comes with an arguably more complex set of considerations, most notably in relation to the way in which pensions interact with state benefits both pre- and post-retirement.
By way of illustration, for a client who is in receipt of contributory Employment Support Allowance (ESA), the existence of a personal pension poses no issues before state retirement age, as non-PI capital is ignored. Where the ESA is income-related (mean-tested), however, any capital extracted from the pension (for example by way of tax-free cash entitlement), can impact on the continued eligibility for ESA if it, along with any other non-PI savings or assets exceeds the current limit of £16,000.
Although accessible from 55 (or earlier if severe ill-health), it is at state retirement age that personal pension plans can be assessed again, this time within the Pension Credit calculations, whether or not the pension plan has, or will be, crystallised. It is also worth noting that the personal pension plans of co-habiting couples (and not just spouses) are considered within this assessment. Thus, a plan holder who, perhaps having no need of additional income from the pension and preferring to leave it intact for his/her spouse or family, may find themselves financially disadvantaged because the Department for Work and Pensions will calculate the income that could be generated from the pension plan, even though it may remain uncrystallised.
A potential further complication surrounds the consolidation (or transfer), of registered pension schemes where the transferor is in ill health. In these circumstances, HMRC has taken the view that such a transfer can give rise to a lifetime transfer of value for Inheritance Tax (IHT) purposes. This precedent arises from the case of Representatives of Staveley -v- HMRC. In 2006, Mrs Staveley transferred the benefits that she had accrued within a Section 32 contract to a personal pension scheme.At the time of the transfer she was in ill health and died shortly after. Her personal representatives argued that the transfer was done in order to prevent her ex-husband from benefitting from the pension proceeds, but the Court of Appeal eventually accepted HMRC’s view of events, in that the transfer was a ‘chargeable lifetime transfer’, and an ‘omission to act’ (i.e. draw any benefits before she died). As a result, the value of the transferred plan was deemed to fall within her estate for IHT purposes.
As this example shows, pensions advice in this area is complex and can only be considered within a holistic planning approach.