It goes without saying there are a multitude of reasons to review your pension. Our previous article ‘Why Should I Review My Pension?’ covered many of these and as these remain wholly pertinent in today’s pension market, I shall not go over old ground here.
However, the last point regarding pension income options is the starting point for my piece here and now. It is fair to say that the new pension rules and regulations that came into effect in April 2015 have seen the most significant changes to pensions, since April 2006, commonly known as ‘A Day’, when all of the differing pension regimes were ‘simplified’ into one.
The new legislation has fallen into two main categories; pension access and death benefits. The new pension freedoms, which saw the removal of the inherent restrictions previously imposed through the introduction of Flexi-Access Drawdown (FAD), allow individuals to freely make their own decision regarding how they access their accumulated pension pots. To be abundantly clear, this is an area of planning in regard to which we strongly recommend clients seek professional advice before exercising any such access. An incorrect decision may result in a punitive Income Tax liability.
The second significant change focused on death benefits. This introduced a regime whereby the tax treatment of pension funds on death now depends on whether the pension plan holder is pre age 75 or post age 75 on death. Funds passed on pre age 75 remain tax free to the inheritors of the fund where upon attaining age 75, on the death of the pensioner, the funds would be subject to Income Tax at the inheritor’s marginal rate. Also introduced were changes that allowed the beneficiaries of such funds to retain those monies within their own FAD rather than receive them immediately through a tax free (pre 75) or taxable (post 75) lump sum. This gives the beneficiaries the choice to keep the funds invested in a highly tax efficient environment until such time as they are needed or wanted or perhaps the marginal rate of tax may be lower, e.g. a higher rate tax payer becoming a basic rate tax payer in retirement.
There are two angles which should be examined as part of a review of pension death benefits; what the rules permit with regard to options and what the provider can facilitate. Let us first take a look at what the rules allow, which I have simplified in table form below. These depend upon whether a formal nomination has been made and whether there is a surviving spouse, civil partner or other individual who is deemed to be a surviving dependant.
|
Nomination? |
Surviving Dependant? |
Options for death benefits (FAD, Lump Sum or Annuity) |
|
No |
Yes |
– At trustee discretion all options are available to surviving dependants – Trustees permitted to pay immediate lump sum only to any others |
|
No |
No |
At trustee discretion all options available to chosen individuals |
|
Yes |
Yes |
All options are available to surviving dependants and to nominated individuals |
|
Yes |
No |
All options available to nominated individuals |
It is not unfair to say that most pension investors want their spouses or civil partners to inherit their pension funds on their death, particularly when in the accumulation phase of their retirement planning. Therefore, regardless of whether a nomination has been made or not, the full range of options remains available to them.
However, where one would wish for other individuals to benefit, for reasons of succession or perhaps Inheritance Tax (IHT) planning, in order that the full range of options remains open, it should be made clear to the pension scheme administrators who those individuals are. This may be via a formal nomination or, with at least one provider, an indicative letter is acceptable.
Of course, this is all predicated on the assumption that the full range of options is available from the provider of the pension arrangement. What has become quite clear from our dealings with various pension providers is that older policies, particularly those built and administered on older IT infrastructures, cannot and will not offer Flexi-Access Drawdown within the current plan. Some providers have offered a work around to these IT limitations by agreeing internal transfers on death to more modern plans that can facilitate FAD. However, some of course have not.
Therefore, the key point to draw from this is that it is has never been more important to review and update potential beneficiaries of one’s pension funds to ensure certainty of inheritors and certainty of options. Just because the overriding legislation permits Flexi-Access Drawdown on death, it does not necessarily concur that Flexi-Access Drawdown will or can be facilitated. And whilst the payment of a lump sum, taxable or tax free, may be of great benefit, it may not actually be wanted, particularly if, as with other assets, you want your pension funds to be a valid part of your succession planning and cascade through the generations.