You may have heard the hype about the pension death benefits, but cutting through the jargon what does it really mean?
The pension benefits rules mean that pensions are now far more ‘inheritable’ than ever before. This means that you can now use your pension pot as a vehicle to pass down wealth to future generations, not just to nominated dependents.
The new rules have introduced two significant changes:
So, for the first time, pension wealth can be passed down to adult children within the ‘pension wrapper’ rather than as a lump sum, and there is no requirement for them to wait until they reach 55 to access it.
This means that the fund remains invested in a tax-free environment, free from income tax and Capital Gains Tax. It’s outside your estate for Inheritance Tax and doesn’t count towards your beneficiaries’ lifetime allowance. The same benefits apply as the pot is passed down through the generations.
You can nominate a beneficiary and they can access the pension pot at any age, drawing as much or as little as they choose. The big change is that they can then nominate their own beneficiaries to inherit the pension pot on their death – allowing pension wealth to be passed on without ever forming part of an estate for tax purposes until it is paid out.
So, how does this affect you?
So much has changed that now is the time to be reviewing your pension arrangements. Things to consider when planning to pass on wealth through your pension might include:
The answers will, of course, come down to your personal circumstances, and your Independent Financial Adviser will be able to advise on what is best for you and your wishes for the future. If you’re hoping to leave a flexible legacy from your pension to family members you need to check that you have everything in place to make that happen.
The time to do it is now. Tomorrow could be too late.
Existing pension schemes already in place may not be able to facilitate the changes so it is important to review your current pension provision and make any changes necessary to take full advantage of the new options.
Some older schemes may not be able to offer inherited drawdown and the only option in such a scheme may be an annuity. Your current pension may not allow a lump sum to be paid to a bypass trust… Dying while stuck in the ‘wrong’ pension scheme may mean your preferred option just isn’t available and in some cases there may be no option at all, and it may be too late to put things right.
If it’s important to you to know where death benefits from your pension will be going, a review of your current pension provision will set your mind at rest, or allow you to transfer benefits to a scheme that can accommodate your preferences under the new options.
* Bypass trusts can only receive lump sums and are therefore always taxed at 45%
**For 2015/16 non-drawdown lump sums will be taxed at a flat rate of 45%