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Pension Changes & New Death Benefit Rules
Since the arrival of the Pension changes on 6 April 2015 many people have overlooked the new Death Benefit Rules and Inheritance Tax (IHT) planning opportunities available for a defined contribution pensions scheme.
With the new rules it is possible that the deceased’s Pension Fund can stay within the pension scheme and with flexi- access drawdown, the surviving beneficiary can be provided with as little as or as much income as they need and with the opportunity of future successors being able to benefit too.
A pension holder now can on his death, often pass their pension fund to his beneficiaries. Available options include:
• Lump-sum death benefits payable to a nominated beneficiary.
• Flexi-access drawdown by a dependant of the member or by a nominated beneficiary. (The survivor is entitled to inherit the member’s unused drawdown funds or uncrystallised funds through one of several forms of beneficiaries’ flexi-access drawdown known as dependant’s, nominees’ or successors’ flexi-access drawdown.)
Authorised Death Benefits & Tax Outcomes
Authorised Death Benefits can now be distributed in one of the below methods with varying tax outcomes:
• Beneficiaries’ Annuity
No income tax will be payable on these payments if the member dies before reaching 75. If the member dies after reaching age 75, the payments under beneficiaries’ annuity will be subject to income tax at the beneficiary’s marginal rate.
• Beneficiaries Drawdown
No income tax will be payable on income withdrawal if the member dies before reaching age 75. If the member dies after reaching aged 75, the withdrawal will be subject to income tax at the beneficiary’s marginal rate.
• Lump Sum Death Benefits
If a member dies before reaching age of 75, there will generally be no tax charge on lump sum death benefits paid from crystallised or uncrystallised funds, although a lifetime allowance charge may arise; and after reaching age 75 for the 2015 – 16 tax year, a special lump sum death benefit charge of 45% will apply or:
After reaching age 75 2016 – 17 tax year and thereafter the lump sum death benefit will be subject to income tax at the recipients’ marginal tax rate.
To qualify for the favourable tax treatment available ( in most cases where the member died before reaching age 75, death benefits must be paid, or start to be paid, within two years of the members death or the date of the scheme administer first knew of the death (if later).
Careful planning will be required to maximise the benefit and possibly pass valuable assets down the generations. Spousal Bypass Trusts will continue to have a role in the planning process particularly where continued control or asset protection is sought and we shall be pleased to give further guidance.