SLIDE 1 PENSION DEATH BENEFITS
FACTS AND PLANNING
12 December 2018 Justin Corliss, Senior Business Development Manager
SLIDE 2 PENSION DEATH BENEFITS 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 LEARNING OBJECTIVES
SLIDE 3
PENSION DEATH BENEFITS
THE OPTIONS
SLIDE 4 PENSION DEATH BENEFITS
Scheme rules rule….
Schemes may not allow full flexibility Schemes are not all discretionary
HOW IT WORKS
SLIDE 5 PENSION DEATH BENEFITS HOW IT WORKS
Original DC Pension
Death of member
Lump sum or annuity
Dependant or nominee(s)
? Lump sum
? Yes Yes Lump sum
?
Scheme administrator will nominate
No Yes
Death of nominee
No
Dependants or nominee ‘s FAD
No
SLIDE 6 PENSION DEATH BENEFITS HOW IT WORKS
Original Pension
Lump sum or annuity
Death of dependant or nominee
Dependants or nominee’s FAD
Death of member
Lump sum or annuity
Successor’s FAD
Death of survivor
Lump sum or annuity
Successor’s FAD
Death of survivor
SLIDE 7
PENSION DEATH BENEFITS WHO CAN GET WHAT
Beneficiary Options Dependant Lump sum and/or income Nominee Lump sum and/or income No Dependant or Nominee Scheme administrator discretion Lump sum and/or income Anyone else but Dependant exits Lump sum Income
SLIDE 8 PENSION DEATH BENEFITS EXPRESSION OF WISH
24/7 access to online service
Do the scheme rules allow it? Who do you want to receive benefits?
What do you want to give?
SLIDE 9 Planning Point: Make sure expression of wish forms regularly reviewed especially if separation/divorce/remarriage
PENSION DEATH BENEFITS EXPRESSION OF WISH
SLIDE 10 PENSION DEATH BENEFITS HOW IT WORKS
Original Pension
Scheme Administrator discretion
Death of member
Gather evidence
Direction/Binding nomination Nominated beneficiaries receive funds according to rules Chosen beneficiaries
according to rules
SLIDE 11
Planning Point: Check how scheme is set up PENSION DEATH BENEFITS SCHEME RULES RULE
SLIDE 12
PENSION DEATH BENEFITS
TAXATION
SLIDE 13 PENSION DEATH BENEFITS TAXATION
- 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
- r special lump sum death benefit charge of 45% for a non-
individual but no LTA test
UNCRYSTALLISED PENSION FUND
Member
1st Death
- 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
SLIDE 14 PENSION DEATH BENEFITS TAXATION
- Death before 75 - no income tax * and no LTA test
CRYSTALLISED PENSION FUND
Member
- 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
SLIDE 15 PENSION DEATH BENEFITS TAXATION - RESPONSIBILITIES
Scheme Beneficiaries
HMRC PRs
Tell PRs LTA used Issue bill to Beneficiaries Decide on death benefits Notify HMRC of excess
SLIDE 16
PENSION DEATH BENEFITS
INHERITANCE TAX
SLIDE 17
PENSION DEATH BENEFITS TAXATION - IHT
Estate subject to IHT Pension Pension Estate subject to IHT
SLIDE 18 PENSION DEATH BENEFITS TAXATION - IHT
The he pen pension sion vs discr vs discret etiona ionary y tr trust ust
Trust Pension Putting money in During At the end 20% over NRB Exempt Up to 6% Normally exempt Total of 40% Normally exempt
SLIDE 19 PENSION DEATH BENEFITS
When does IHT apply?
TAXATION - IHT
1 2 3 4
Contributions Annuity guarantees Estate entitled to benefit/power of disposal Transfers
SLIDE 20
PENSION DEATH BENEFITS
Mark lives in England, is terminally ill and divorced
EXAMPLE - HOW IHT MIGHT WORK ON TRANSFER
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
SLIDE 21
PENSION DEATH BENEFITS
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
EXAMPLE – HOW IHT MIGHT WORK ON TRANSFER
Loss to the estate
SLIDE 22
Planning Point: Could there be an IHT impact? What is the impact? PENSION DEATH BENEFITS IHT
SLIDE 23
PENSION DEATH BENEFITS
SPOUSAL BYPASS TRUSTS
SLIDE 24 PENSION DEATH BENEFITS
Why might you use one?
SPOUSAL BYPASS TRUSTS
1 2 3
Control Tax Other reasons
SLIDE 25 PENSION DEATH BENEFITS SBT – TAXATION POST 75
Original Pension
Pay to trust – SLSDB charge of 45% deducted
Death of member
Trust pays to beneficiary with reclaimable tax credit Pay to individual – marginal rate deducted Beneficiary claims tax back from HMRC
?
SLIDE 26
Planning Point: Is a SBT appropriate? PENSION DEATH BENEFITS SPOUSAL BYPASS TRUSTS
SLIDE 27
PENSION DEATH BENEFITS TRIGGER POINTS
Type of scheme Life events
1 2 3
IHT
SLIDE 28 PENSION DEATH BENEFITS 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 LEARNING OUTCOMES
SLIDE 29 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 Register, 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
