Though unpleasant and often unexpected, death should never be unplanned

While death is never the cheeriest of subjects, it’s important that investors fully appreciate the new pension death benefit flexibility that’s now available so they can arrange their pension savings in the most tax efficient way to provide the best possible outcomes for themselves and their beneficiaries.

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Before 6 April 2015, death benefits in the form of drawdown income could only be paid to an investor’s ‘dependants’, in other words to:

  • a spouse or civil partner
  • a child under the age of 23
  • a child over age 23 but financially dependent due to physical or mental impairment
  • someone else who in the scheme administrator’s opinion was financially dependent on or interdependent with the investor

Now it’s possible for uncrystallised and drawdown funds to be used to provide income to other individuals too (or instead), namely to ‘nominees’. ‘Nominees’ are individuals who have been chosen by the member or by the scheme administrator to have the option of taking income. A nominee must not be a dependant of the member.

In addition, on the death of a dependant or nominee, their remaining drawdown funds can be used to provide income to ‘successors’, and subsequently, on their death,  to other ‘successors’, provided the scheme offers this new flexibility. ‘Successors’ are individuals who have been nominated by a dependant, a nominee or a previous successor or nominated by the scheme administrator, to have the option of taking income. A successor can be a dependant or a non-dependant. 

A nominated individual can be given the option of a lump sum instead of income, if the scheme allows for this. The ability to pay a lump sum death benefit from uncrystallised and drawdown funds to a trust or a charity - under the scheme’s discretionary disposal powers, also continues to be available. 

This new death benefit flexibility will allow for inter-generational transfers of pensions wealth, retaining pension savings within a registered pension scheme long term and providing the opportunity to keep money out of the investor’s and their beneficiaries’ estates.

Any lump sum or income paid to a dependant, a nominee or a successor, will normally be tax free if the investor or beneficiary (from funds directly inherited) died before age 75. Where the investor or beneficiary (from funds directly inherited) died on or after age 75, any lump sum death benefit will be taxable at 45% (at least for tax year 2015/16) and any income paid to a dependant, nominee or successor will be taxable at the beneficiary’s marginal rate.

Investors with uncrystallised and drawdown funds should be asking themselves:

  • What are my available death benefit options?
  • How do I best make adequate provision for my beneficiaries?
  • Will my existing scheme offer this new benefit flexibility or will I need to transfer to a scheme that does?

It is vitally important to ensure that the pension arrangement offers all of the retirement income and death benefit flexibility that is needed, that the investor, dependant, nominee or successor fully understands all the options that are available and that suitable nominations are supplied, regularly reviewed and kept up to date. 

Death benefit flexibility should be a priority topic in any wealth planning discussion you have with your clients. Our webinar gives more details(Opens new window) on how the new pension freedoms will play out in practice and there’s detailed technical information available on our website. 

Photograph of blog entry author Martin Haggart, Technical Manager Pensions

Martin Haggart

Technical Manager Pensions