You are here: Home - Retirement - Retirement planning - How to -

Everything you wanted to know about pension death benefits

0
Written by:
20/04/2015
Confused about the new rules on pension death benefits. Claire Trott of pensions specialists Talbot & Muir, provides comprehensive guidance on the changes.

Overview

When a member of a registered pension scheme dies HM Revenue & Customs rules detail the ways in which it is possible to use the remaining funds or benefits. The options available will depend on a number of different factors. The pension reforms from April 2015 focussed mainly on the benefits from money purchase schemes, the information below relates to these types of schemes and not final salary/defined benefit schemes.

Although the changes really came into force on 6th April 2015, the announcement was made on 30th September that the changes would be happening and that people could defer their decisions until after the end of the tax year in order to take advantage of beneficial changes. The way in which the benefits are taxed is mainly determined by the age at which the person dies and if they we under 75 or 75 and over.

Pre 75 benefit options – death of the member

Capped/Flexi-access Drawdown or uncrystallised funds

The value of the pension fund at the date of death will be payable to the beneficiaries.

It is possible to nominate any beneficiary and the payments will be made free from income tax provided they are designated within two years of the member’s death. A designation means the actual payment being made if a lump sum is chosen or the implementation if another option, such as drawdown is chosen. If the designation is made after 2 years and from uncrystallised funds then any income paid will be subject to income tax at the beneficiary’s marginal rate and any lump sum paid will be subject to a flat rate charge of 45% for the tax year 2015/16.

Beneficiaries will either be a dependant or a nominee. A nominee is someone who is nominated but not actually dependant on the member. There is no limit on the number of beneficiaries who can be named to receive benefits.

The beneficiary can choose how they want to take the benefits, including:
• A lump sum payment from the scheme;
• Flexi-access drawdown;
• An annuity; or
• A scheme pension.

Not all schemes will offer all benefits and you should check the scheme rules to ensure that the preferred options will be catered for.

Scheme pension

A money purchase scheme pension will have had certain options available at the time that it was established and any benefit payable will depend upon the basis of the scheme pension and how long it has been in force. There may be some funds remaining after these determined benefits are paid and this can be used provide benefits in just the same way as drawdown above.

Annuity (Lifetime, Fixed Term or Investment Linked)

Whether there is any benefit entitlement will depend on the basis of how the annuity was set up, including how long the annuity was in force at the time of death. Annuities purchased after 5th April 2015 may be able to offer additional options when determining who the benefits can be paid to.

Only joint life and guarantee payments that started after the 5th April 2015 and where the original member died after 3rd December 2014, will be able to be paid tax free, any payments in force before that time will continue to be taxed at the beneficiary’s marginal rate.

Post 75 benefit options – death of the member

The value of the pension fund at the date of death will be payable to the beneficiaries.

It is possible to nominate any beneficiary and the payments will be taxed according to the way in which they are paid. Beneficiaries will either be a dependant or a nominee. A nominee is someone who is nominated but not actually dependant on the member. There is no limit on the number of beneficiaries who can be named to receive benefits.
The beneficiary can choose how they want to take the benefits, including:
• A lump sum payment from the scheme, taxed at a flat rate of 45% for the tax year 2015/6;
• Flexi-access drawdown, taxed at the beneficiary’s marginal rate as income
• An annuity, taxed at the beneficiary’s marginal rate as income; or
• A scheme pension, taxed at the beneficiary’s marginal rate as income.

Not all schemes will offer all benefits and you should check the scheme rules to ensure that your clients preferred options will be catered for.

Scheme pension

Any benefit payable will depend upon the basis of the scheme pension and how long it has been in force. Any remaining fund can be used to provide benefits in just the same way as drawdown above.

Annuity (Lifetime, Fixed Term or Investment Linked)

Whether there is any benefit entitlement on the death of the member for a beneficiary will depend on the basis of how the annuity was set up, including how long the annuity was in force at the time of death. Annuities purchased after 5th April 2015 may be able to offer additional options when determining who the benefits can be paid to.
Any joint life and guarantee payments will be taxed at the beneficiary’s marginal rate.

Death of a beneficiary

If a beneficiary has chosen to take flexi-access drawdown then on their death there may still be remaining funds in the pension. The beneficiary can name their beneficiaries to receive the remaining funds in much the same was as if they had been their funds originally. Their beneficiaries are called successors and need not be associated in any way with the original member. The tax treatment is determined by the current beneficiary’s age when they die, refer to the section on pre and post 75 benefits above for full details.

This can continue indefinitely, with a successor leaving the fund to another successor as long as some funds remain

Lifetime Allowance

Funds that are not already crystallised (put into payment) before death will be tested against the lifetime allowance when the member dies, there is no test on the death of a beneficiary because they will already have been tested.
If the value of the death benefits takes them over the lifetime allowance then the beneficiary will need to pay the appropriate lifetime allowance charge. If there is more than one beneficiary the charge is apportioned across the fund they each receive so one beneficiary isn’t lumbered with the whole charge.

These tests only apply if they benefits are designated within two years of the members death, but it should be noted that should the designation not occur within two years the other tax benefits that would be applicable will be lost and the beneficiary will pay income tax on the income and 45 per cent flat rate on the lump sum.

If taken as a lump sum the charge on is 55 per cent flat rate on the excess over the lifetime allowance; if paid chosen to be paid as an income such as drawdown or an annuity then the charge will be a flat rate of 25 per cent of the excess over the lifetime allowance. The charge is payable directly by the beneficiary to HMRC and will not be deducted from the funds before payment by the scheme administrator.

Inheritance Tax

Pension death benefits will not normally be subject to Inheritance Tax (IHT) regardless of the age of the scheme member at death. However, if pension benefits have been paid from the scheme by way of a lump sum to the member’s beneficiaries those funds form part of the recipient’s estate for IHT purposes. If the beneficiary chooses to opt for flexi-access drawdown with the fund then they will remain part of the pension scheme and still outside their estate on their death.

HM Revenue & Customs reserve the right to subject a pension fund to an IHT charge if they feel it has been used for tax avoidance purposes. From 6th April 2011, the failure of the member to exercise their right to draw benefits at their nominated retirement age will no longer result in an IHT charge.

Expressions of Wishes

Whilst the scheme member cannot make a binding request that the scheme trustees pay the benefits from their pension to a specified beneficiary or beneficiaries – there can be IHT implications where this is not the case – they can submit an indication of how they would like their remaining benefits disposed of on death, called an Expression of Wishes.

Legally pension scheme trustees retain absolute discretion when it comes to the payment of death benefits, however the wishes of the member will often be taken into consideration, they can be updated at any time before death of the current holder of the pension (member or beneficiary)

With the changes to the death benefit options it is essential that expression of wish forms are reviewed frequently and new forms are completed on the death of a member, dependant, nominee or successor to ensure there is always a valid form on file. Should there be no indication of who the scheme administrator should pay they are compelled to pay a dependent if possible.

Talbot and Muir – Telephone 0115 841 5000, www.talbotmuir.co.uk

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Woodford and Invesco named in worst performing funds list

ISA and pension investors in the UK have record amounts of cash tied up in consistently underperforming ‘dog’...
Woodford and Invesco named in worst performing funds list

Move your savings now to beat inflation

More savings accounts now pay an inflation-beating rate of interest, but two in three savers won’t switch.
Move your savings now to beat inflation

Could these hacks help you save £6,000 a year?

The average UK household could save up to £5,950 a year, but research shows that savings rates across the popu...
Could these hacks help you save £6,000 a year?

Ryanair jetting towards US flights for £10

Ryanair is on course to achieve its long-held ambition of offering transatlantic flights to the US – and the...

Investing in car parks: a good vehicle for income seekers?

As the search for income continues, many investors are turning to alternatives, with car parks becoming increa...

A quick guide to guarantor loans – in association with Guarantor Loan Comparison

Considering a guarantor loan or becoming a guarantor yourself? Read our essential guide...

Results round-up: Companies to watch this week

Mulberry and more will face the music this week.

Product launches of the week

Select Property Group, Schroders, Leeds Building Society and more have exciting news this week.

Money Tips of the Week

Read previous post:
Kit Klarenberg
BLOG: Reports of Gatwick oil have been greatly exaggerated

Last week, UK Oil & Gas Investments claimed it had discovered over 100bn barrels of oil in West Sussex.

Close