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As part of the pension changes that came into force in 2015, there were significant changes to the way that death benefits can be paid from your pension scheme.
The tax treatment of death benefits paid from your pension now depends on your age when you die. And it no longer matters if you have ever taken any benefits from your pension scheme before.
If you die before your 75th birthday, the pension funds can be paid to your beneficiaries tax free.
The tax treatment is the same regardless of whether the beneficiaries choose to take a lump sum or income.
In the event of death after your 75th birthday, the death benefits will be taxed.
If your beneficiaries use the funds to take income or as a lump sum, this will be taxed at their marginal rate of income tax.
|Death pre 75|
|Old rules||New rules|
||All tax free|
* Crystallised funds = the fund remaining after you have taken any pension benefits.
|Death post 75|
|Old rules||New rules|
|Lump sum||Subject to 55% tax.||Taxed as Income.|
Previously, you could only nominate someone who was financially dependent on you (normally a spouse or child under 23). From 6th April 2015 you can nominate whoever you like to receive your death benefits. This could be your spouse, children or grandchildren, or you can nominate someone unrelated to you if you wish.
You do not need to leave the benefits to just one person, you can split them in whatever proportion you like, so each of your beneficiaries receives a share of your fund.
It is even more important that death benefit instructions take into account your wishes. A nomination will help guide the other pension scheme trustees in their decision making and will ensure that your instructions are followed.
If there are no instructions in place, you’re relying on the pension scheme trustees to second guess your intentions. And with such wholesale changes to the death benefit it is essential to review existing nominations.
Just click on ML Nomination Form where you find a nomination form for you to complete if you wish to update your beneficiary or beneficiaries. This can be emailed or posted to us at the addresses below.
If your beneficiary has not withdrawn the entire fund before their death then the funds can be passed on again. Your beneficiary will be able to nominate successors who they want the funds to go to following their death.
The successors will then have the option of taking the funds as a lump sum or using it to provide an income.
The tax treatment of the death benefits will depend on the age of the beneficiary who was holding the pension at their death, not on how old you were at your death.
As an example, if you live to be 85 and leave the fund to your child age 55 then the death benefits payable to your child would be taxed (as you lived to be over 75). If your child took the benefits as income and the fund had not all been used before their death at age 70 then the remaining fund could be passed on to their successors tax-free as they died before age 75.
It is possible to have unlimited successors, so your pension fund could be passed on for generations if it is not all taken out.
The primary benefit of a bypass trust is to ‘bypass’ payment to a chosen dependent, usually your spouse, to avoid their estate increasing. This favorably reduces the impact of IHT in the event of the dependant’s death while at the same time continuing to give the dependent total access to the money in the trust.
As a result of the changes in April 2015, the pension funds can now remain in the deceased member’s pension scheme and the fund can be drawn by the dependent as and when money is required. This now achieves the similar advantage of the bypass trust as the death benefit does not have to be paid out as a lump sum, therefore does not increase the dependent’s estate.
Therefore in a large number of instances it may become more tax efficient for the death benefits to be nominated to a beneficiary or beneficiaries, rather than to a bypass trust.
These are significant changes which are beneficial to pension savers. You can now build up a pension fund in the knowledge that you can pass on money to family without the punitive 55% tax charge.
However it is vital that you review your nomination form highlighting who you would like to receive your death benefits and make sure it is kept up-to-date.
As the death benefit rules offer some really positive tax planning opportunities, it is strongly recommended that you contact your financial advisor.
For further information on your pension scheme administered by Morgan Lloyd, or any enquiry, please do not hesitate to call and one of our team members will be happy to helpView more