Since the introduction of pension freedoms in 2015, the one area that continues to give real planning opportunities is that of death benefit rules and the resultant estate planning that can be achieved.
When I started in the pensions world, the key was that pensions were to provide an income for life and any inheritance tax (IHT) planning was secondary (lifetime income being the quid pro quo for tax relief).
In the Brave New World of pension freedoms we have decided that a lifetime income is not necessary and the tax treatment of funds on death now offers new opportunities.
The received wisdom now appears to be: spend your other assets but leave your pension fund, as this could be the most tax-efficient from an IHT perspective. This article is a summary of some of the key points.
Who can receive benefits?
The old rules allowed an individual pension holder to pass on assets on death in the form of drawdown to his or her ‘dependants’ (that is, the spouse/civil partner, a child under 23, or a person who was financially dependent or mutually financially dependent).
Alternatively, a lump sum could be paid to a trust, charity or other nominated beneficiary – the key issue that these potential beneficiaries have in common is they are chosen by the pension plan holder.
The new rules maintained the concept of ‘dependant’ but also added the concept of ‘nominees’ and ‘successors’.
A ‘nominee’ means an individual nominated by the member, or nominated by the scheme administrator, but only in the absence of any dependant of the member or member nomination.
A ‘successor’ means an individual nominated by a dependent, nominee or successor of the member (in relation to their own death), or nominated by the scheme administrator, but only where the beneficiary has not made a nomination.
It is the successor who provides the option; in the past everything emanated from the person who accrued the benefit – now deceased. The idea that a successor can be nominated by a beneficiary offers both opportunity and potential problems.
Consider the following:
Mr Smith has a large self-invested personal pension (Sipp), and on his death he has a widow and two grown-up children who are not dependents. He nominates Mrs Smith to receive the benefit, expecting that any residue will ultimately go the way of the children. Mrs Smith, however, nominates as her successor someone totally different (her new husband, say).
The saving factor could well be that the trustee of the scheme still has discretion to pay out a lump sum.
The idea of nomination is very important, as, for a non-dependent beneficiary to receive income benefits, they must be a nominee (or successor on second or subsequent death).
| Key points |
Death benefit rules and the resultant estate planning that can be achieved is one area that can generate financial planning opportunities. Pension freedoms mean that money remains in the pension plan and can be a real family trust for generations yet to come. It is also important to consider any lifetime allowance charge. |
