Shake-up to death benefits have been positive, writes Susanne Beveridge
There have been so many changes to pensions in recent times (and indeed there is much more on the horizon) it can be hard to keep track. Lifetime allowance reductions and restrictions on tax relief have been well-publicised and are generally seen as negative changes. However, the changes to pension death benefits are, in general, very positive. In order to ensure the best use of these changes it is vital that you take the appropriate steps to preserve the opportunities and flexibility that they have brought.
The main options in relation to pension death benefits depend on whether or not there is a surviving spouse or dependent children and whether or not an individual has made a nomination.
After a person has died the variety of options available include the payment of an ongoing pension to an individual or, potentially, making a lump sum pension payment to an individual or to a trust.
The new rules mean that a pension member can now “nominate” an individual (which can mean more than one individual and can include charities but not a trust) as well as dependents. This means that those nominated as well as dependents can potentially benefit from an ongoing pension. This could be a valuable option as the pension will remain “intact” within a pension “wrapper”. It could also be efficient from an inheritance tax perspective as the pension fund will not, unlike a lump sum payment, form part of the estate of the individual or individuals benefiting from the pension.
It is important that any nomination by a pension member should, in most cases, seek to retain as much flexibility as possible.
There are separate rules for lump sum death benefits where the pension scheme administrator will retain discretionary powers to pay them to an individual or to a trust.
Whether or not a trust is appropriate will depend on each family’s circumstances. Family circumstances can be complicated. Payment of ongoing death benefits may not be acceptable for many who either have young children or have perhaps married again for the second time and would like children from the first marriage to benefit. In addition, if a beneficiary has received a lump sum, these death benefits will form part of their taxable estate for inheritance tax purposes. They will also potentially be exposed to claims from spouses, creditors and local authorities. The use of a trust in these circumstances means that the trustees chosen by the individual will make the decision over who benefits.
It is always important to compare and contrast the differing tax considerations. It may well be worth thinking about whether it is preferable to get the funds out into a trust if the member dies under the age of 75, as if a person dies before this age, pension death benefits can be paid tax free. If they are older than 75 when they die, the beneficiary pays income tax on the funds that they take out, whether this is taken all in one go, or in a series of income payments.
Money held in a pension fund will continue to grow tax free. If funds are transferred to a trust then the funds will suffer the usual income and capital gains tax liabilities to trusts. It is also necessary to consider the ongoing inheritance tax charges for trusts.
Of course, each individual’s circumstance are different, and that’s why it’s important to get advice from a specialist. Pension arrangements should be reviewed on a regular basis to ensure these are up to date and reflect current circumstances.
• Susanne Beveridge is a partner in the personal & family team at Brodies LLP