From the 6 April 2015 it’s all change for the rules and regulations relating to Pension Death Benefits for Defined Contribution Pension Schemes - and it’s important for you to be sure of where you stand so you can be financially savvy about your future options.
We’ve asked Chartered Financial Planner and Director of Derbyshire’s Midland Financial Solutions Kevin Edwards to offer his expert opinion on this complex area…
“Not everybody wants to talk about financial planning for when you pass, however, it’s one of those things that will really matter to the loved ones that you leave behind. Of course it’s a personal choice, but I’d rather know I’d done the best I could for my loved ones so that they are financially secure after I’m gone – it’s one of the many reasons I trained as a Chartered Financial Planner. The trouble is, the current financial rules are so complex, it’s often difficult as a lay person to know where to start, and Pension Death Benefits are no exception.
“The key factor from 6 April 2015 will be the age of death,” says Kevin. “And, as before, there are differences on what you can do depending on if your funds are uncrystallised (not drawn on yet/no money has been taken from the pension) or crystallised (where money has been taken from the pension).
“Currently, if you’re under age 75 when you pass away, you’ll be able to ensure lump sums from uncrystallised funds can be passed on tax-free, lump sums from crystallised funds can be passed on less a 55% tax charge and income can only be paid to a dependent, taxable at the recipient’s marginal rate.
“However, from 6 April this year you will be able to pass on lump sums from crystallised funds, tax free – although these lump sum payments must be made within two years of the date of death, otherwise a tax charge will apply.
“You’ll also be able to have your income paid to anyone, not just a dependent – and tax-free! But again, the income designation must be made within two years of the date of death; otherwise a tax charge would apply.
“If your death occurs when you are aged 75 or over, you’ll now be able to pass on lump sums from crystallised or uncrystallised funds, less a 45% (instead of 55%) tax charge, with income being paid to anyone (not just a dependent). And from 2016/17 this will revert to being taxed at the recipient’s marginal rate of Income Tax.
“When it comes to the topic of ‘Generation Planning’ i.e. planning for your children and their children’s secure financial futures, there are also some changes of note to the current rules. The Beneficiary of a pension fund on the death of a member can subsequently make their own ‘Expression of Wishes’. This means that your fund can potentially be passed on again and again. This potentially allows for the pension fund to continue to grow almost tax-free, whilst not forming part of any beneficiary’s Estate for Inheritance Tax (IHT) purposes.
“If you think about it, this could significantly change the way you may plan to pass on your Estate. For example, we have clients who’s Estates are worth significantly more than the IHT ‘Nil Rate Band’ (£325,000 until at least the 2018/19 tax-year) who are currently taking the maximum Pension Income Drawdown to deliberately erode their pension fund over time, leaving their personal assets to continue to grow, as otherwise on their death their pension fund would suffer a 55% tax charge (higher than the 40% IHT on personal assets!).
“However, under the new rules anyone who has not yet reached age 75 should seriously reconsider their IHT and Estate planning, as in the example above their pension fund could now potentially be passed on completely tax-free on their death, whilst personal assets would suffer a 40% IHT charge – so it might now be best to erode personal assets first instead!
“There are also some logistical details to consider. For example, the new rules apply for payments of Pension Death Benefits on or after 6th April i.e. it is not determined by the date of death. Therefore if a pension scheme member died before 6th April 2015, but the payment of death benefits could be deferred to 6th April then the new rules could apply.
“And everyone should be aware that just because changes are allowed under legislation, not all pension providers will offer this death benefit flexibility.
“If you take anything from this article, then review any existing Expression of Wishes/Death Benefit Nomination that you have made for your pension funds (or make one if you haven’t already done so), as otherwise your pension may not pass on as tax efficiently as you’d wish and those that rely on you will miss out.”
for further information please contact Midland Financial Solutions Ltd on 01332 345546
www.midlandfinancialsolutions.co.uk
Risk Warnings:
• Midland Financial Solutions Ltd is Authorised & Regulated by the Financial Conduct Authority (FCA).
• The FCA does NOT regulate taxation advice.
• This article does NOT constitute advice and you should seek professional advice that is suitable for your own circumstances.
• The value of investments can fall as well as rise and you may receive back less than you originally invested.
• Based on current legislation and HM Revenue & Customs practice and current rates of tax, which could change in the future.
