People inheriting pension savings must decide what to do with funds within two years of the member’s death or risk being hit with unnecessary tax charges, experts warn.
The coalition Government abolished the death benefit tax on pensions in drawdown or value protected annuities if the member dies before the age of 75.
However, this only applies if the beneficiary either moves into flexi-access drawdown or takes a lump sum within two years. If they do not, the assets will be treated as if the member died after 75 and taxed at the beneficiary’s marginal rate, or 45 per cent if taken as a lump sum.
Talbot and Muir head of technical support Claire Trott says moving funds into flexi-access drawdown “can be a real benefit for those with illiquid assets such as a commercial property”.
She says: “There have been cases where the beneficiary would like to take the lump sum but isn’t able to realise the asset within two years. It is then possible to designate into flexi-access drawdown before the two years are up and then when the asset is sold the fund can then be paid out as a single income payment free of income tax.”
AJ Bell head of platform technical Mike Morrison adds while recent reforms have increased the appeal of pensions as a way of passing down wealth, advisers need to be wary of exceptions.
These include a possible HMRC tax charge if a member contributed to or transferred their pension for the purpose of passing on assets, rather than providing a retirement income.
For instance, the tax office’s “two-year rule” could mean beneficiaries are hit with an IHT charge if a member known to be in ill health dies within two years of making a transfer.