PENSION DEATH BENEFITS FACTS AND PLANNING Justin Corliss, Senior Business Development Manager 12 December 2018
PENSION DEATH BENEFITS LEARNING OBJECTIVES By the end of this session you will be able to: • Identify what death benefit choices are available • Explain the taxation of death benefits • Understand the impact of IHT on death benefits • Describe spousal bypass trusts and how they work
PENSION DEATH BENEFITS THE OPTIONS
PENSION DEATH BENEFITS HOW IT WORKS Scheme rules rule…. Schemes may not allow full flexibility Schemes are not all discretionary
PENSION DEATH BENEFITS HOW IT WORKS Original DC Pension Death of member Yes No Dependant or nominee(s) ? Lump sum Scheme administrator No Yes or annuity will nominate ? Lump sum or Lump sum Yes No or annuity annuity ? Dependants or nominee ‘s FAD Death of nominee
PENSION DEATH BENEFITS HOW IT WORKS Original Pension Death of member Lump sum or Dependants or nominee’s FAD annuity Death of dependant or nominee Lump sum or Successor’s FAD annuity Death of survivor Lump sum or Successor’s FAD annuity Death of survivor
PENSION DEATH BENEFITS WHO CAN GET WHAT Beneficiary Options Dependant Lump sum and/or income Nominee Lump sum and/or income No Dependant or Scheme administrator Nominee discretion Lump sum and/or income Anyone else but Lump sum Dependant exits Income
PENSION DEATH BENEFITS EXPRESSION OF WISH 24/7 access to online service Who do you want to receive benefits? What do you want to give? Do the scheme rules allow it?
PENSION DEATH BENEFITS EXPRESSION OF WISH Planning Point: Make sure expression of wish forms regularly reviewed especially if separation/divorce/remarriage
PENSION DEATH BENEFITS HOW IT WORKS Original Pension Death of member Direction/Binding Scheme Administrator discretion nomination Nominated Gather evidence beneficiaries receive funds according to rules Chosen beneficiaries offered death benefits according to rules
PENSION DEATH BENEFITS SCHEME RULES RULE Planning Point: Check how scheme is set up
PENSION DEATH BENEFITS TAXATION
PENSION DEATH BENEFITS TAXATION UNCRYSTALLISED PENSION FUND Member 1 st Death • Death before 75 and paid within 2 years – no income tax but LTA test after 2 years – income tax at recipient’s marginal rate of tax or special lump sum death benefit charge of 45% for a non- individual but no LTA test • Death after 75 - income tax at recipient’s marginal rate or special lump sum death benefit charge of 45% for a non- individual but no LTA test
PENSION DEATH BENEFITS TAXATION CRYSTALLISED PENSION FUND Member • Death before 75 - no income tax * and no LTA test • Death after 75 - income tax at recipient’s marginal rate or special lump sum death benefit charge of 45% for a non- individual but no LTA test * Lump sums from crystallised funds must meet the 2 year rule or they are taxable
PENSION DEATH BENEFITS TAXATION - RESPONSIBILITIES PRs HMRC Beneficiaries Scheme Notify Decide on Tell PRs Issue bill to HMRC of death LTA used Beneficiaries excess benefits
PENSION DEATH BENEFITS INHERITANCE TAX
PENSION DEATH BENEFITS TAXATION - IHT Pension Pension Estate subject Estate to IHT subject to IHT
PENSION DEATH BENEFITS TAXATION - IHT The he pen pension sion vs discr vs discret etiona ionary y tr trust ust Trust Pension Normally exempt 20% over NRB Putting money in During Up to 6% Exempt Total of 40% Normally exempt At the end
PENSION DEATH BENEFITS TAXATION - IHT When does IHT apply? 1 Contributions Annuity guarantees 2 3 Estate entitled to benefit/power of disposal 4 Transfers
PENSION DEATH BENEFITS EXAMPLE - HOW IHT MIGHT WORK ON TRANSFER Mark lives in England, is terminally ill and divorced He has 2 adult children He transfers his DB pension to a DC scheme and dies 2 months later The transfer of value is £1 million
PENSION DEATH BENEFITS EXAMPLE – HOW IHT MIGHT WORK ON TRANSFER Before figure – this depends on the open market value (high as death was soon after transfer) HMRC state it to be £980,000 After figure – calculated using an UFPLS 25% of £1m taxed at 0% = £250,000 Income tax of 45% of £750,000 (other taxable income of £150,000) =£337,500 Value of retained rights £1m - £337,500 = £662,500 Before figure – After figure = £980,000 - £662,500 = £317,500 Loss to the estate
PENSION DEATH BENEFITS IHT Planning Point: Could there be an IHT impact? What is the impact?
PENSION DEATH BENEFITS SPOUSAL BYPASS TRUSTS
PENSION DEATH BENEFITS SPOUSAL BYPASS TRUSTS Why might you use one? 1 Control 2 Tax 3 Other reasons
PENSION DEATH BENEFITS SBT – TAXATION POST 75 Original Pension Death of member Pay to trust – SLSDB Pay to individual – marginal rate deducted charge of 45% deducted Trust pays to beneficiary ? with reclaimable tax credit Beneficiary claims tax back from HMRC
PENSION DEATH BENEFITS SPOUSAL BYPASS TRUSTS Planning Point: Is a SBT appropriate?
PENSION DEATH BENEFITS TRIGGER POINTS 1 Type of scheme 2 Life events 3 IHT
PENSION DEATH BENEFITS LEARNING OUTCOMES By the end of this session you will be able to: • Identify what death benefit choices are available • Explain the taxation of death benefits • Understand the impact of IHT on death benefits • Describe spousal bypass trusts and how they work
THANK YOU The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales, company number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Marketing Limited is authorised and regulated by the Financial Conduct Authority and introduces Royal London’s customers to other insurance companies. The firm is on the Financial Services Registe r, registration number 302391. Registered in England and Wales company number 4414137. Registered office: 55 Gracechurch Street, London, EC3V 0RL. RL Corporate Pension Services Limited, registered in England and Wales, company number 05817049. Registered office is at 55 Gracechurch Street, London EC3V 0RL. December 2018| PR P PN 0035
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