WHY would my clients want their pension death benefits nominated to trust?
Most people set up Pension Plans to ensure that they can maintain a reasonable standard of living for themselves after they have stopped working and they no longer have a regular source of income. But what happens to that pension pot and / or any Death in Service entitlement if they happen to die whilst still in service?
Any lump sum payable from a Pension can be assessed and is potentially vulnerable to any of the following risks if thought is not given to the options available at the time:
- Remarriage of surviving spouse
- Creditors or Bankruptcy
- Care costs
Pension Freedom Fund Legislation
Points to consider:
The new ‘Pension Freedom’ rules allow clients with Pension Funds to pass these funds onto Beneficiaries who can then access and treat the funds as their own. The ‘flexi access’ may be available Tax free as income or a lump sum(s). Your current Pension may not be a ‘Flexi Pension’, but may be amended, or you could move to another scheme that provides the new flexible benefits.
Post April 2015 Pension Freedom rules enable improved Tax free and more flexible access to Pension funds for your Nominated Beneficiaries. This is however, only available should you die before age 75.
Post age 75, the same flexibility applies, but benefits are taxable as income to the receiving Beneficiary. This could be the whole fund taken as one lump sum or drawn down each year as income. One concern here is that unless specifically Nominated, the Beneficiary cannot gain all the Tax free benefits. Even if that Beneficiary has decided not to take benefits, could their right to take all or any part of the Pension fund be assessed as if it was their asset or right to income? By not taking these benefits could they be challenged as depriving their estate and Creditors?
DEATH OF A CLIENT UP TO AGE 75
- The fund (if the plan has Flexi Access) can be passed to a fund for a Nominated Beneficiary.It becomes their Pension and with it all the usual Pension Tax Benefits, So, Tax efficient growth in the fund, access to the fund without restriction,and now Tax free.
- If there is no Flexi Pension option then the lump sum can still be paid Tax free to the Nominated Beneficiaries or Trust, but thereafter growth and income would be taxable to the Beneficiary or Trust.
DEATH OF A CLIENT post AGE 75
- If there is a ‘Flexi Pension’ option then the lump sum may be paid to the Nominated Beneficiaries, but subject to Income Tax at 45% until April 2016 and thereafter at their marginal rate as and when they take benefits. Should they draw down the fund in stages, all withdrawals would be taxed at the marginal rate.
- If there is no ‘Flexi Pension’ then the fund would be available at the Trustees’ discretion and taxed as income at the Beneficiaries’ marginal rates.
In any event we strongly advise that your client’s carefully consider expressing their wishes to their Pension Provider(s) by establishing a more detailed Nomination form than previously necessary. It is worth remembering that previously this could be done on their behalf after death. This is no longer the case with Pensions Freedom where, if the Beneficiaries are not nominated by the member in lifetime, then the Tax paid could be increased significantly.
The Potential Pitfalls of either having NO Nomination or a BASIC Nomination
- The Pension Death Benefits may be paid to someone you don’t intend.
- The Pension Death Benefits may become subject to IHT on the death of your Nominated Beneficiaries should they receive funds absolutely.
- The Pension Death Benefits may be paid to a Beneficiary who is about to Divorce or enter Care, for example, and may be lost to your intended Beneficiaries.
- It may limit the efficiency of Tax and Bloodline Planning options for your Beneficiaries.
Why leave your hard earned Pension funds to chance?
The best advice is to put in place a carefully worded and bespoke Nomination for each Pension Provider. This will ensure maximum flexibility and efficiency on your client’s death, irrespective of the type of Pension that they currently hold now. This needs to be reviewed in the event that either the scheme changes or the benefits are transferred to another Pension Provider.before age 75.
The Contingent Death Benefit Nomination
John Smith has Company Death In Service (DIS) benefits of £160k and a Personal Pension Plan (PPP) with a fund value of £140k.
A Family Pension Death Benefits Trust has been established for John and detailed and a contingent Nomination form was put in place before death.
Option 1 – The Trustees accept the funds
Both the DIS Benefits and the PPP = £300k As they total less than the available Nil Rate Band enter John’s Family Pension Death Benefits Trust 1.
Option 2– The Trustees refuse the funds
As the Trustees of John’s Family Pension Death Benefits Trust 1 have refused to accept either of these, both the Company Death in Service & the Personal Pension Plan pass directly to the Beneficiaries.
Why would the Trustees refuse to accept the funds?
In the event a spouse/partner or children could receive and retain the pension fund and take benefits Tax Free thereafter to specific nominated Beneficiaries, then the Trustees would refuse to accept the funds in most circumstances.
Whatever your Pension, Countrywide would advise that you put in place the following planning:
- Family Pension Death Benefits Trust.
- The new more detailed and contingent Nomination form which must be put in place before death. The nominations are contingent on your Trustees accepting, or refusing to accept the funds in favour of your other nominated Beneficiaries if they may receive these on more Tax advantageous terms.
- Appoint Trustees to the Family Pension Death Benefits Trust who can make the decision whether to accept the Pension Funds on death or optimise the flexibility and Tax benefits of the new Pensions Freedom Legislation should this be available.
- Nominations should be reviewed should your Pension Providers terms change or if you transfer or join another Pension Scheme.
This page contains only general planning and is not to be construed as advice for any personal planning. Each strategy recommended is based on individual circumstances.