New rules surrounding pension death benefits mean it is more important than ever to get your house in order.
What will happen to my pension when I die?
Changes to Pension death benefits on the 6th April 2015 mean there is now more flexibility when it comes to who you pass your pension pot to. The new rule changes cover mainly defined contribution or money purchase schemes – in other words where you are paying money in, to build a pot at retirement – or pots already in drawdown. Final Salary schemes are not affected, although the new changes may mean some people would like to review their final salary schemes to see if they are still of benefit to them.
The new rules give people with pensions far more options when it comes to death benefits. It also allows benefits to be paid more tax efficiently – with a few caveats. Therefore the worse thing you can do, if you have pension benefits now, is to not fill in the nomination of benefits form to nominate who you want the benefits to go to. As this may mean your loved ones could miss out.
The main changes to pension death benefits
The main change was in terms of who you can now pass your pension benefits to on death. Previously, your pot could only be passed to your spouse, civil partner or dependent. However the new changes mean you can now pass your pension to anyone you nominate. This is a huge change and will effect a wide range of people, in particular co-habiting couples.
Death Before Age 75
Drawdown Pensions – If you have a drawdown pension and die before 75, the benefits can be paid as a lump sum or as a drawdown pension to any beneficiary tax-free up to the lifetime allowance limit of £1,030,000.*
Lifetime Annuities – If you have a lifetime annuity and die before 75, any beneficiary can receive the payments tax-free up to the lifetime allowance limit of £1,030,000. *
*These payments need to be paid within two years of death otherwise they are treated differently.
Death After Age 75
Drawdown Pensions – If you have a drawdown pension and die after age 75, the benefits can still be drawn down as income or paid as a lump sum and they will be taxed at the beneficiaries marginal tax rate.
Lifetime Annuities – If you have a lifetime annuity and die after the age of 75, any beneficiary can receive the payments taxed at their marginal tax rate.
Finally you could have the benefits paid into a trust with a 45% tax charge on it. We have arranged this for clients previously where for example the intended beneficiary is the clients spouse. Their spouse had children from a previous relationship, but the client did not want their pension benefits to go to these children in the event of their spouse’s death. In this instance a trust was set up and there was an expression of wish given via the trust for the benefits to stay within the clients bloodline only, and not to pass to the spouses other children on death. It might also be a consideration to set up a trust if the benefits were to pass to a child but you were concerned that they were having marriage difficulties – and do not want the pension benefits to be taken into account in the event of a divorce.
Exceptions to the new pension death benefit rules
Company Scheme Pensions – Will continue to be taxed on death at the dependents marginal rate of tax regardless of the age at which the individual died.
The benefit of Drawdown death benefits over annuities
In the event of the beneficiaries death, if the beneficiary was taking benefits in the form of a drawdown pension, they can nominate who continues to receive this income so the benefit does not die with the beneficiary. This is not the case with an annuity where on the death of the beneficiary, the annuity will stop. Its also important to note that any payment to a beneficiary from an annuity is only allowed if this option was taken at retirement – which is not always the case.
What should you do now to make sure your house is in order?
- Have you completed a nomination of wishes form to nominate who will receive your pension benefits in the event of your death? If you haven’t filled in the form it will be at the discretion of the trustees or administrators who may not know your wishes.
- Who do you want to benefit from your pension pot in the event of your death? If it is not your spouse / civil partner, does your scheme accept the new rules, as not all schemes do – its worth checking.
It is important to note that this article forms an overall summary of the current rules, however there are exceptions to every rule. There are advantages and disadvantages to every pension type. If you are unsure which type is the most suitable for you it is always important to seek independent financial advice to ensure the policy you have is suitable for you.
We hope you have found this article helpful. If you have any questions regarding the points raised please get in touch with our pension’s specialist Angus Willson via email on firstname.lastname@example.org or call Angus or one of the team on the number below.