Greater flexibility over pension rules could help dairy farmers to supplement their income during the current downturn. Stuart Coombe, from accountant Old Mill, explains.
Dairy farmers facing a temporary downturn in profitability could benefit from greater flexibility over pension rules, by supplementing their income from their pension fund.
Although not a long-term solution to unprofitable businesses, farmers over the age of 55 could use their pension to see them through a difficult period. Recent changes to the pension rules mean they are much more flexible to use now. From the qualifying age farmers can take as much or as little from their pension fund as they like, which can be extremely useful in times like this.
Farmers can take a 25% lump sum tax-free, after which drawings will be subject to Income Tax at the usual rates. They should also be aware that once they have started drawing from their pension, they can then only top up £10,000 a year tax-free compared to the usual maximum of £40,000.
Having a pension is all about saving for retirement, so taking money early should not be done lightly. It is important to look at all your financial options and assets, and have a robust budget and cash flow forecast so you know you are not pouring good money after bad.
Other changes to the pension regulations mean farmers can now pass on their pension fund to the next generation tax-free. Pension funds used to be taxed at 55%, so that is a huge saving. It’s particularly useful where farmers have put land and other assets into a self-invested personal pension. In the past they were very difficult to pass on but now it’s a lot easier to plan ahead for inheritance.
Assets can effectively remain in the pension fund indefinitely: If the pension holder dies before the age of 75 the fund is passed on tax-free, and all subsequent drawings from it will also be tax-free. However, if they die after the age of 75, while the transfer is tax free, any subsequent drawings will be subject to Income Tax. The fund effectively becomes the successor’s pension but they don’t have to wait until retirement to draw from it.
However, many of the new benefits do not apply automatically, so it’s essential that farmers are proactive and fill out a nomination form, identifying who they want to inherit their pension after their death.
Other changes mean people can cash in existing annuities for a lump sum, and can choose whether to keep their funds invested or use them to purchase an annuity to take a guaranteed payment for life.
Annuities cannot be passed down the generations in the same way as a lump sum, but don’t rush to cash in your pension, as many older schemes have extremely attractive annuity rates of up to 15% a year. You won’t get that sort of return anywhere else, so be very careful – make sure you understand the full implications before making any changes.