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Pension Death Benefits

July 11, 2016

Following the overhaul of pensions in April 2015, much has been publicised about the new freedoms around accessing your pension and the much improved options about being able to pass your pension benefits on to your loved ones in the event of death, however there has been less publicity about the fact that your existing pension plan may not allow your beneficiaries the full flexibility allowed under the new regime.

The details in this article purely relate to defined contribution (money purchase) plans and do not apply to defined benefit (final salary) plans.

The new death benefit rules for money purchase (defined contribution) pensions mean that in the event of death prior to age 75, your entire pension pot can be left to any nominated beneficiary completely free of tax. If death occurs after the age of 75, your pension pot can still be left to any nominated beneficiary, although the receiving beneficiary will pay income tax on the funds when they are paid out. The fund will be added to the beneficiaries earned income in that tax year. This means that if the beneficiary receives a sizeable death benefit payment, they may be liable to higher rate (40%) or additional rate (45%) tax on some or all of the payment.

It is possible to plan around this tax liability if the beneficiary opts for ‘beneficiaries flexi access drawdown’. This option works by allowing the death benefit payment to be paid in to a beneficiaries pension plan, instead of being paid out in a single lump sum. Once the fund is within the beneficiaries flexi access drawdown fund, the beneficiary can withdraw as much or as little as and when required. This means that the beneficiary is in complete control of how much tax they pay. If they do not require the income it is possible to not take any benefits. An additional benefit is that in the event of the beneficiaries death, they can also nominate their own beneficiaries to receive the fund. This means that a pension pot can be passed from generation to generation with good planning.

It is worth noting that whilst money is held in a pension it is not assessed for inheritance tax upon death, which makes it more attractive for many people to retain the money within a ‘pension wrapper’.

All the above flexibility sounds great, however most people are not aware that many older style pension plans will not fully support the ability to offer a ‘beneficiaries flexi access drawdown’ plan and will instead only be able to pay out a cash lump sum to the beneficiaries, which could potentially expose them to an unwelcome tax sting.

If you are considering including your pension plan into your estate planning strategy it is highly recommended that you establish whether or not your existing plan would offer the beneficiaries the ability to retain the benefits within a pension. It is also highly recommended that you ensure your pension death benefit nomination form has your desired beneficiaries named. Again, this should be checked with your pension provider.

If you would like to know more call 079100 74611.

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