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Advisers warned over death-in-service lifetime allowance tax risk

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Advisers must be wary of a little-known quirk in pension lifetime allowance rules that could see savers hit with a “nasty” tax charge, AJ Bell says.

HMRC rules mean death-in-service benefits deemed to be paid out of a registered pension scheme count towards the deceased individual’s lifetime allowance, which will fall from £1.25m to £1m in April.

If the receipt of a death-in-service benefit pushes the value of a person’s total pot beyond the threshold, they will face a 55 per cent tax charge.

AJ Bell technical resources manager Gareth James says: “This is one of the lesser-known implications of the reduction of the lifetime allowance but it could have a big impact. A significant chunk of someone’s lifetime allowance could be eaten up by a death-in-service benefit, creating a nasty tax surprise for beneficiaries.

“People need to ask their employer how their death-in-service scheme is structured and whether a payout would count towards their pension lifetime allowance. If so, the need to consider protecting their lifetime allowance is even more important.

“Employers can help by applying for an excepted policy but they… risk taxation at the 10-year anniversary.”

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. ‘Little known quirk’? – well, it is certainly news to me. I would be interested to know what the legal basis for this is.

  2. News to me too. Is a standard Group Life policy, written under the relevant trust classed as a DIS benefit? Until AE came about there were a lot of companies who only has Group Life policies for their employees but no pension. Are relevant life policies then treated as DIS for this purpose? They are basically the same thing – employer paid, tax relievable life policy for members of staff. More questions than answers. (Now that would be a good title for a song).
    Can anyone enlighten me with definitive answers please?

  3. I think relevant life should be okay as it is set up on an individual basis under an individual trust.

    The main problem is where some form of group life has been set up as it would normally be subject to a master trust to avoid it forming part of the deceased’s estate on death. In a lot of instances the Group Scheme was written under pension legislation, as employer contributions are not a benefit in kind, which means it would be treated a Lump Sum Death Benefit and would therefore count towards the LTA.

  4. You would need to check with the insurer what the basis of the policy is. It may well be a pensions policy, but it might be something else such as an Excepted Group Life Policy or a single-member relevant life policy (see s393B(4) of ITEPA 2003).

    If it is a registered pension, then the normal pension rules apply (although post 2006, the concept of death ‘in service’ no longer has any relevance). But what these ‘normal rules’ seems to have been called into question by this article. In particular, my understanding is that payment of a lump sum death benefit or the designation of funds as available for dependant’s flexi-access drawdown etc had the effect of using up the deceased’s lifetime allowance where those funds had not already been tested, but not that of the recipient.

    Can someone please correct me if I am wrong!

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