Pensions update - changes to death benefits

There have been many changes to pensions recently, one of which is that policyholders are now allowed to pass on their pension savings to a nominated beneficiary, potentially without having to pay a tax bill.  It is thought this relaxation of the rules will result in a large number of beneficiaries paying significantly less tax, if any, when inheriting pensions. 

Following the rule changes on 6 April 2015, a pension can be inherited tax free if death occurs before age 75, so long as it is paid out within two years of the date of death, even if the deceased has taken an income and/or lump sums from their pension pot, and regardless of whether or not the beneficiary decides to take the pension as a lump sum or as an income.  The beneficiary will pay tax at their marginal rate, but this is likely to be less than the previous tax charge of 55%.  This includes annuities purchased since the date of the rule change.

To ensure that your pension is paid to the person(s) you wish, a ‘death benefit nomination’ form or an ‘expression of wish’ form should be completed and registered with your pension provider(s).  In some instances a trust document is used instead. 

If you have already made plans for your pension on your death it is worthwhile reviewing those arrangements to ensure that they remain tax efficient in light of the changes that have now come into effect.  For example, if you are over 75 and your nominated beneficiary is likely to pay higher rate income tax when they inherit, you could, for example, change your nomination to grandchildren, who may be on a lower or nil rate of income tax and would therefore have a lower tax liability. 

Whilst the importance of completing a death benefit nomination form cannot be overstated, it should be noted that although your pension provider will consider your nomination (and usually pay to your nominated beneficiary) they are not obliged to follow your wishes and can pay the benefit to someone else if they deem it to be more appropriate - for example if they consider that another person was dependent on your income.  Therefore it is important to have a valid will in place, and to review that will regularly, as it may also be taken into account. 

We work closely with our colleagues in the wills trust and probate team, who can help with making or reviewing your will.

Kate Barnett
01206 217356
kate.barnett@birkettlong.co.uk