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focusIn 2015, under the Government’s Freedom and Choice pensions reform initiative, things changed radically for members of personal pensions plans. In this Focus we highlight Personal Pension Plan Death Benefits (i.e. not Occupational Pension Schemes) and point to just a few of the key issues that arise from those changes.

Much depends on the age at death of the member. Here is a very brief summary:

Members age at date of death – Pre age 75

(*) Lump Sum – free of tax
(*) Income – free of tax via drawdown
(*) Beneficiary’s Annuity – free of tax

One point to note here is that if you die before age 75 your pension pot will be received by the beneficiary/beneficiaries free of tax. Importantly, if income is withdrawn from a dependant’s drawdown plan, whilst it is received tax-free, it is added to their estate. If this estate is valued at or above any unused Nil Band (currently £325,000 max per individual), it could attract Inheritance Tax (IHT) on their death (currently at 40%).

Upon the death of the dependant, any funds that are retained within the dependant’s drawdown fund may be outside of the estate for IHT and can then be passed down in turn to their dependants. It is important to note that the subsequent tax treatment for the dependant’s beneficiaries will be based upon the age at death of the dependant and not upon the age at death of the original drawdown owner. It is also important to note that the dependant will in turn be responsible for nominating their own beneficiaries and, as a result, without planning it is out of the control of the original drawdown owner.

Members age at date of death – 75 or over

(*) Lump Sum – taxed at beneficiary’s marginal rate if an individual, taxed at 45% if, e.g., a trust
(*) Income – taxed at beneficiary’s marginal rate via drawdown
(*) Beneficiary’s Annuity – taxed at beneficiary’s marginal rate

Your pension pot has now become potentially taxable in the hands of the beneficiary/beneficiaries. If you die aged 75 or over, then your pension pot will potentially attract Income Tax at the marginal rate of the recipient. That could result in some of the funds, in part, attracting tax at 60%.

Nominating Beneficiaries

Whether pre age 75, or 75 or over, a personal pension plan member is able to nominate any beneficiary – or a number of beneficiaries.

Key Planning Points

(*) Review all your personal pension arrangements – not all pensions have the degree of flexibility discussed in these brief notes. For example, some older pensions have the default of death benefits being paid to the estate.

(*) Review your existing nomination arrangements – do they meet your current needs?

(*) Ensure that you have chosen your nominated beneficiary or beneficiaries and that you have named them in an expression of wishes – this can be accomplished in a separate document, or it could be included in your Will. Inter alia, where a member has not made a nomination and has left dependants, it is possible that the scheme can only set up drawdown for someone who is a dependant.

(*) If you nominate more than one beneficiary then this could result in a potential reduction in tax:

– In the pre age 75 situation, spreading the assets could result in a reduction in Inheritance Tax as shares of the total pot are added to a number of estates each with their own tax-free Nil Band.

– In the 75 or over situation, spreading the funds could reduce the potential Income Tax liability when the shares of the total pot are received by the beneficiaries each of whom has their own marginal rate of tax – and some may be lower than others.

Next Actions

Our message in this Focus is that all members of a personal pension plan should review all their pension arrangements and, within that review, their requirements as to how Pension Death Benefits should be allocated. Finally, check that your wishes are appropriately recorded.

We have set out above what is only a brief summary of some points that involve quite complex rules. Always take relevant professional advice before taking, or refraining from taking, any action.

Focus Footnote

There are many aspects and opportunities to consider when reviewing what you would like to happen to the benefits from your pensions plans. Consequently, we thought it would be helpful if we addressed some of those aspects in greater detail. The additional notes are included at the end of the client Newsletter PDF.

Barry Fleming & Partners has grown from a tax advisory background into a broader business that encompasses investment management. Both things matter for wealth management, retention and creation. That expertise makes the company strikingly different from others.

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Barry Fleming & Partners are an independent financial advisor specialising in ISA’s, Pensions, Tax, Trusts, Estate Planning, Inheritance Tax Planning (IHT) and other Financial Planning areas. Please don’t hesitate to call on 01488 608 686 and ask to talk to one of our financial advisors. Alternatively use the contact form on our home page.