View more on these topics

Old Mutual: Savers must beware pensions ‘death tax’ risks

Jon Greer Peach 620x430

Recent reforms have thrust pensions into the spotlight like never before, but evidence suggests the public still have relatively limited understanding of the key characteristics of pensions as a savings vehicle. Even fewer will be aware of the technicalities of pension legislation.

Amendments to the detail of the draft Taxation of Pensions Bill mean many risk blindly wandering into an unintended tax bill if they do not have a full understanding the tax rules surrounding pension death benefits.

Under today’s rules, scheme administrators are awarded some discretion over how dependants drawdown is paid out. Where the nominee is outdated, has never been specified or the nominee would prefer the pension pot to be passed on to someone else, the scheme can apply common sense.

This allows pension savings to be passed on – either as a cash lump sum or a dependants pension – in a manner which best suits the personal circumstances of the beneficiaries.

However, new rules indicate schemes will not be given that discretion where an individual is taking benefits under the new flexi-access drawdown system. Dependants benefits must instead be paid out to the most immediate dependent or the nominee, where one has been designated by the member.

In most cases, passing benefits on to a spouse will be the preferred option anyway and defaulting to this will not be a problem.

But for others, it could mean an unnecessary tax bill.

Take a married individual that dies at, say, 73. Following the abolition of the 55 per cent death tax on pensions, that money could pass on totally tax-free to any beneficiary. Assuming the individual’s partner is comfortable in their own retirement, it may well be preferable to pass the assets within the pension wrapper to children (or even grandchildren) to draw as income as they wish without paying any tax.

However, the current Tax Bill proposals stipulate the scheme must pass the benefits on to a spouse or children under 23 unless the member made a specific nomination before death. The worst-case scenario would see the pension paid by default to a spouse with no need for the additional funds.

If they then subsequently die aged over 75, when the pension pot is eventually passed on it will be taxed at the beneficiaries’ marginal rate. That tax could easily have been avoided by nominating the children as original beneficiary.

We regularly encounter similar cases but are able to exercise discretion. This option will not be available in future and it seems inevitable some customers will fail to make nominations, despite prompts from their provider.

This is a perfect example of a scenario in which taking advice helps customers ensure they have total peace of mind, knowing they have taken all the necessary steps to pass their savings on to loved ones without unwelcome cost.

Jon Greer is pensions technical manager at Old Mutual Wealth



Redress bill for bank misselling hits £38bn

A widespread “aggressive sales culture” was a major driver of failures within the banking that have cost over £38bn in fines and redress and will take “a generation” to unwind, a report has found. The BBC reports the joint study from the Cass Business School and think tank New City Agenda estimates banks have paid […]


Italian bank eyes Coutts bid

Italian lender Intesa Sanpaolo is considering making a bid for Royal Bank of Scotland wealth management arm Coutts. The Financial Times reports Intesa chief executive Carlo Messina has made expansion in the UK a top priority. It emerged in July that RBS was planning to sell the overseas arm of Coutts, but sources have told […]


Wells Street Journal: The Ros Altmann incident

Dr Ros Altmann, the inspiration behind this week’s Out of Context cartoon, is threatening to become a diary star after comparing pensions to sex (sort of). The Government’s older workers adviser (definitely a real job and in no way an attempt by politicians to get the most quoted woman in pensions on side) was in […]

Stock ideas in an online bloodbath

In a harsh environment for retailers, compounded by the lacklustre growth in consumers’ disposable incomes, there are some companies benefiting from the disruption caused by the internet to traditional business models, says Nick Clay, alternate manager in Newton’s Global Higher Income team. Rising online sales were credited with improving profits at a number of retailers […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and thought leadership.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm