Summer 2015
New Pension Options The new pension benefits rules mean that pension pots are far more inheritable than ever before. You can now consider using your pension as a vehicle to pass wealth down through the generations.
What’s Changed? Lump sum death benefits can continue to be paid to any nominated individual or trust. But the new rules no longer restrict a continuing pension income to a dependant. Pension savings can now be passed to any nominated individual (but not a trust) to draw an income from, while remaining in a tax privileged pension wrapper via an inherited drawdown fund. Once a drawdown fund has been created for a nominated beneficiary, they can access the pot at any age, drawing as much or as little as they choose. And they can nominate their own beneficiaries to inherit the pension pot on their death. This allows pension wealth to be cascaded down the generations, with fully flexible access, and without ever forming part of an estate until it is paid out.
Age at death now determines the tax treatment of pension death benefits. On death before age 75, any pension death benefits can be paid tax free. This includes any nominations in favour of a bypass trust. On death from age 75 the beneficiary pays income tax on the money they draw, whether this is taken all in one go, or as a series of income payments. Careful planning can therefore minimise the tax that has to be paid. Bypass trusts cannot be nominated for income, and so can only benefit from a lump sum, which will always be taxed at 45%. For individuals the same tax treatment applies to both income and lump sums provided on death (For 2015/16 only, non-drawdown lump sums will be taxed at a flat rate of 45% on death after age 75). So much has changed that it will require a reassessment of what would happen in the event of the death of a pension plan holder. The most suitable option, or combination of options will depend upon the personal circumstances of the plan holder. If you are hoping to leave a flexible legacy to family members from your pension, you need to check that that you have everything in place to make that happen.
Why Thomas Carroll? Having the availability of the full range of death benefit options from a modern, flexible pension and keeping nominations up to date has increased in importance. And the time to do it is now; as tomorrow could be too late. Although the new rules can be applied to all defined contribution pensions, not every pension provider can facilitate them. For example, there will be a number of older schemes which cannot offer inherited drawdown and the only income option will be an annuity. It’s not just a question of how death benefits can be paid – where they can be paid is also important. For example, anyone who would like their death benefits paid as a lump sum to a bypass trust will need to check that their current pension provider allows this. Dying while stuck in the wrong pension scheme may mean that your preferred option isn’t available and in some cases there may be no option at all. And it will probably be too late to put things right. It’s easy to think that planning pension flexibility can be left until close to retirement. But effective planning needs to ensure that you and your loved ones are catered for in any circumstance – including the premature death that nobody wants to think about.
Contact us If you wish to discuss the content of this brief in more detail please contact Louise Eedy directly on 02920 855 244 or e-mail ifa@thomas-carroll.co.uk
We have the honour of being named ‘The Chartered Financial Planners of the Year1 by the Personal Finance Society – the body which grants Chartered status to IFA firms and individuals. Our title demonstrates the excellence, commitment to professionalism, training and development of our people which our clients and professional colleagues have come to expect from us. We have recently been awarded Corporate Financial Planning Firm of the Year2 and Retirement Planning Firm of the Year3 by Bankhall Group, the UK’s largest distributor of financial services. Authorised and regulated by the Financial Conduct Authority. The Financial Conduct Authority does not regulate taxation and trust advice deposits or advice on debt or State benefits. Tax and legislation are liable to change. This information is based on our current understanding of UK law and HM Revenue & Customs practise and legislation we believe may apply in the future. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.
1. Awarded by the PFS in 2009 2. Awarded by Bankhall Group in 2012 &2014 3. Awarded by Bankhall Group in 2010 &2011