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Thousands could be hit by 45% pension death tax on trusts


Thousands of savers could be caught out by small print that means some pension death benefits will still be taxed at 45 per cent.

Last week’s Finance Bill confirms that, from April 2016, death benefits will be taxed at the recipient’s marginal rate whether paid as a lump sum or income from drawdown if the original saver dies over the age of 75.

But the Bill also says where benefits are not paid to an individual, pension assets passed on as a lump sum will be taxed at 45 per cent.

Old Mutual Wealth pensions technical manager Jon Greer says: “It is common for death benefits to be paid this way in older-style pension contracts that pre-date modern personal pensions.

“Consumers should look carefully at their retirement savings schemes and consider speaking to an adviser to clarify how their pension assets will pass to family on death. Older-style contracts may lead to the assets being subject to 45 per cent tax unnecessarily.”

Talbot and Muir head of pensions technical Claire Trott says the 45 per cent charge “makes sense” in avoiding confusion over whose marginal rate is used but warns “thousands” could be impacted.

She says: “It may be better to nominate a number of individuals or change death benefit nominations away from trusts at the age of 75, although advice is key because there are many factors to consider.

“If the scheme isn’t offering the pension freedoms for members, it is unlikely to be able to offer flexi-access on death, although it may be able to provide an annuity. It isn’t safe to assume that all schemes will offer all the death benefits and it isn’t possible to transfer after death until the benefits have been designated.”

Money Minder Financial Services managing director Ray Black says: “For the thousands of advisers who have done a good job in the past under old legislation and put in place spousal bypass trusts and similar arrangements, they need to revisit these. They need to establish with the client whether it might be better going from a trust to nominating one or more named beneficiaries.”

If the original saver dies under the age of 75, pension assets in drawdown or value-protected or joint-life annuities are passed on tax-free.



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There are 2 comments at the moment, we would love to hear your opinion too.

  1. This is an interesting one ! and needs to be looked at carefully !

  2. In simple terms and having looked at a multitude of scenario’s, the use of SBT’s will now never be tax efficiency, as a passed on drawdown arrangement will always beat the SBT or at least match it, but always with additional bells and whistles. Post age 75, the passed on drawdown is miles ahead.

    The only real reason to use SBT’s now is client drivers, such as concerns about ensuring that such things as sideways dis-inheritance doesn’t occur.

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