With so many changes to pensions being announced, it is easy to overlook or become blasé about the impact some will have. The dramatic changes to death benefits are a case in point. Scrapping the hated 55 per cent tax charge, giving much greater flexibility for annuity death benefits and allowing many more people to inherit pension funds were on many pension geeks’ Christmas lists. However, most expected the pension equivalent of a pair of socks.
From April, assuming providers make the necessary changes, people will have many more options, with the probability of more money passing to loved ones when they die as tax is reduced or removed and much greater control around who receives their savings. But with all this choice and control, the need for advice becomes ever greater.
A number of historic questions – whether benefits were crystallised, or whether funds are within drawdown or annuity – become irrelevant.
The simple position is: if death occurs before the age of 75, benefits will be paid tax-free to the beneficiary. Die aged 75 or over and benefits will be liable to income tax in the hands of the recipient – although there is an anomaly in the first year for lump sums, where a flat 45 per cent charge is levied.
For drawdown, this presents tax planning opportunities. As funds can now be bequeathed to any beneficiary, the ability to cascade money down generations, within the pension wrapper, is an option. This flexibility of choice of recipient means, for example, rather than leave all funds to a partner who may pay income tax, some could be left to a grandchild who can take some income tax-free.
There are also many more options available under annuities. The old worry that funds will disappear on death may become less common. Longer guarantee periods, perhaps to make certain of up to 20 years’ worth of income, and the likely increased use of value protection, means higher death benefits can be paid with less tax, so passing more money on to dependants. Again, the ability to control who receives the income or lump sum allows tax-planning opportunities.
It is important not to forget inheritance tax. Where recipients are decided by the trustees or scheme administrator taking into account the individual’s wishes, there should be few problems. But if the individual has control of the recipient then IHT can come into play.
Overall, these are fantastic changes for both drawdown and annuity customers. But there is a clear need for people to keep preferred recipients up-to-date and structure arrangements so tax is minimised. Advisers have a crucial role to play.
Andrew Tully is pensions technical director at MGM Advantage