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.”