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Pension death benefits: full flexibility is being squandered

Increasing numbers of pension customers are missing out on the ability to cascade pension wealth efficiently when they die. Find out how you can help ensure your clients can make the most of their pension.

Due to ambiguity, challenge or no expression of wishes, Old Mutual Wealth has seen a significant jump in the amount of pension death cases that need to be referred to the Trustee Board (2014: 16% jumping to 2016: 28%).

The freedom and choice changes heralded a dramatic change in how pension death benefits are taxed and the flexibility to cascade pension wealth tax efficiently. This has happened at a time when more and more customers are facing tax issues on death:

 In the last 8 years, asset values have increased:

  • FTSE100 has more than doubled
  • Average house prices have gone up c40%

At the same time, tax bands/allowances have not kept pace:

  • The Nil Rate Band has remained at £325,000
  • The Lifetime Allowance has shrunk to £1,000,000

This means that pension death benefit planning has become more important. Alongside this, it should be remembered that pensions do not need to adhere to the normal principles of inheritance tax planning:

  • There is no need to make outright gifts and live 7 years.
  • Customers can access money up until their death.
  • Access to money can be available to beneficiaries before probate.

Therefore, it is vitally important to make sure that customers have the right arrangements in place for when they die. Our own analysis has identified the following:

  • With the growth of flexi-access drawdown, there has been an increase in the number of death claims over the age of 75 (2014: 6% jumping to 2016: 20%). Remember that tax-free death benefit lump sums are no longer possible once the deceased has passed their 75th birthday.
  • Due to ambiguity, challenge or no expression of wishes, Old Mutual Wealth has seen a significant jump in the amount of pension death cases that need to be referred to the Trustee Board (2014: 16% jumping to 2016: 28%).

The key element that all advisers should not forget is how important it is to ensure your clients make nominations on an expression of wish form and keep them up to date. To support you with this, there are four important facts that you need to know.

 

  1. 1.       Death Benefit Taxation

Crystallised or Uncrystallised

Death pre 75

Death post 75

Lump Sum Death Benefit

Tax-free*

Taxed at beneficiaries’ marginal rate**

Beneficiary Flexi Access Drawdown

Tax-free*

Taxed at beneficiaries’ marginal rate

* Subject to lifetime allowance

** For a trust (45%) / Charity (tax-free)

 

  1. 2.       Important Differences in Terminology

Term

Description

Beneficiary

Generic term that can mean dependant, nominee or successor

Dependant

Some who is dependent on the member (i.e. Spouse or child under the age of 23)

Nominee

Anyone who is nominated on the member’s expression of wish (i.e. non-dependent child, grandchild, friend)

Successor

Anyone who succeeds a Dependant or Nominee

 

  1. 3.       Who can receive benefits on a member’s death?

Lump Sums

  • Dependant
  • Any other beneficiary nominated by the member
  • Any other beneficiary chosen at the discretion of the scheme administrator

Flexi-Access Drawdown

  • Dependant
  • Anyone nominated by the member on their expression of wish

The scheme administrator cannot use their discretion to give flexi-access to anyone else if there is a nomination on file or a dependant exists.

 

  1. 4.       Beneficiary taxation

Income taken from beneficiary flexi-access drawdown does not affect the beneficiary’s annual allowance or lifetime allowance.

And finally, the changes to the death benefit taxation mean you should view pensions as a legacy plan, where:

  • defined contribution savings should be the last asset to be accessed
  • there is now the opportunity for generational wealth planning
  • potential beneficiaries must be involved in the intended planning
  • pensions create financial planning opportunities for future savings patterns.

For financial advisers only. Not to be relied on by consumers.

The views expressed by external contributors are not necessarily those of Old Mutual Wealth or Old Mutual International.

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