The impact of death on pensions

How your pension is treated on death has changed and represents a significant long term planning opportunity for many.

We covered the subject previously here for those with money purchase or defined contribution pension schemes.  Those with final salary or defined benefit schemes aren’t affected by these changes, but a recent Supreme Court ruling on rights for unmarried couples could pave the way for changes to be made.

Pre-April 2015

Scheme administrators paid out the death benefits at the scheme trustees’ discretion, usually in accordance with the member’s nomination or expression of wish to whoever that may be - spouse, child, trust, sibling etc. The nomination or expression of wish is not a binding arrangement, but it does provide a clear statement of intent for the administrators to consider. Anyone in a drawdown arrangement would have suffered a 55% tax charge on death if a lump sum was paid out, but income payments could continue to be paid to a dependent.

Post-6 April 2015

A nomination or expression of wish is still very much required, but instead of being paid out, the pension benefits can remain in situ.

Under the new rules, anyone is able to benefit from an individual’s accrued pension benefits, no matter their age, and if they subsequently pass away what’s left of this inherited pension fund can also be passed on to nominated person (s).

Theoretically, there’s no limit on the number of times a pension fund could be passed on, so if the fund is not depleted it could be passed down the generations for many years. Income already in payment from pensions (such as a drawdown arrangement) can now be paid to any nominated individual too.

What’s important to note is the age of the pension scheme member when death occurs. If they were under the age of 75 the income or lump sum payment can be made to the beneficiary tax free, as long as it’s made within two years of death. If the member dies over the age of 75, the income or lump sum payment will be taxed at the beneficiary’s marginal rate of income tax.

Should the beneficiary not need the income the fund can be left within the pension scheme, benefiting from the tax advantages that pensions are afforded. They are also free to take the income and spend it as they see fit, but may incur taxation as a consequence.

Operational issues

Application of the new death benefit rules isn’t mandatory and pension scheme providers can choose whether or not to offer the flexibility of payments. Some providers may not have the operational functionality to accommodate the changes, while others may simply choose to adopt the changes.

Final Salary schemes

As noted previously, the amendment to the rules for pension benefits on death has primarily been made to those accruing benefits in money purchase pension  arrangements. Those in final salary schemes remain bound by the rules of the scheme trustees as to who and how benefits are to be paid on death of a member. Some scheme rules allow unmarried couples to receive a survivor’s pension and others don’t, so it’s important to ensure that the relevant nominations are provided to the scheme trustees.

Whichever type of pension arrangement you hold, it is important that your intentions are known as to how you would like your pension assets distributed on your death. Whilst these revised rules can be very useful for those undertaking inheritance tax planning, being aware of provider’s restrictions is equally important.

To understand how the rules apply specifically to you and to review your arrangements, contact your local Financial Planning Consultant

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