Advisers must take action to ensure the beneficiaries of deceased clients are not locked out of the pension freedoms, experts say.
Money Marketing previously revealed how some of the largest pension providers do not allow beneficiaries to access savings passed on to them using flexi-access drawdown.
Some older contracts only allow beneficiaries to take pensions as lump sums, which could incur extra tax charges, or a lifetime annuity.
Transferring to a flexi-access contract can only be done once funds are in the beneficiaries’ name.
Talbot and Muir head of technical support Claire Trott says: “Advisers need to make sure what death benefit options are available in the scheme if beneficiaries might want something other than a lump sum.
“The last thing you want is a family to come back and say you reviewed this, didn’t check the death benefits and now we’re being forced to take it as a lump sum and pay extra tax which we wouldn’t have had to do if you’d done a transfer.”
Fairey Associates managing director Ed Fairey says: “There’s been a huge amount of noise about getting money out of pensions, but not enough noise about death benefits.
“When Osborne stood up he talked about statutory override, forcing providers to facilitate the freedoms. But they said the cost of changing legacy systems made it impossible. I have a lot of sympathy with that, but once the member has died facilitating a movement to a contract that can do that should be easy.
“The Government should force a statutory override and create a post-death transfer market, similar to the open market option, so beneficiaries have the right to move to a flexi access drawdown-enabled contract.”
In July, the Government confirmed lump sums paid to beneficiaries will be taxed at the recipient’s marginal rate from 2016.
Under the changes to the treatment of pensions on death announced at last year’s Autumn Statement, the Government announced pensions in drawdown would be taxed at the beneficiary’s marginal rate if the member died over 75.
However, savings passed on as a lump sum would be taxed at 45 per cent.
Pensions in drawdown, or in joint life or value-protected annuities, are passed on tax free if the saver dies before the age of 75.
AJ Bell has called for the Government to equalise the treatment of adult and child dependents. Under the current rules, child beneficiaries must spend down pensions before the age of 23 and risk facing potentially huge tax bills.
Many clients will have read that on death their pension can be passed on within the tax wrapper, retaining the tax advantages.
However, a large number of pension contracts will not offer beneficiaries’ flexi-access drawdown, typically those managed through legacy administration systems. This can be the case even where the arrangement can facilitate full flexibility for the named scheme member during their lifetime.
Similarly, where expression of wish documentation is not kept up to date, pension benefits will often pass to a spouse or civil partner, creating the potential for unnecessary IHT liability.
In an ideal world, these issues could be ironed-out after death, with the agreement of all family members. But therein lies the catch – pension arrangements cannot be posthumously undone.
This is primarily down to two factors. Firstly, trustees are not permitted to use discretion to offer beneficiary flexi-access drawdown to someone who is not a spouse or civil partner of the member. If the member wanted to make sure it was available to their wider family they would have to make a nomination to that effect during their lifetime. This is a requirement of the new pension freedoms legislation.
Secondly, under section 169 of the Finance Act 2004, in order to meet the ‘recognised transfer’ requirements, pension assets must be designated to beneficiaries’ own account before a transfer can be made to an alternative provider.
As a result, the member must elect for an income option (flexi-access drawdown, annuity or lump sum) within the existing scheme. Where flexi-access is not available, they are therefore compelled to take an alternative, sub-optimal option.
The good news is that there is an opportunity for planners to guide clients through this complexity.
Help clients review expression of wish forms to ensure the plan reflects the most efficient strategy for passing on assets to family.
Finally, ensure clients are aware of the death benefit option made available by the incumbent pension scheme and consider an alternative wrapper/provider if the current arrangement does not offer the required flexibility.
Jon Greer, pensions expert, Old Mutual Wealth