Summer 2015
New pension rules and wealth planning The new pension benefits rules mean that pension pots are far more inheritable than ever before. You can now consider using your pension as a vehicle to pass wealth down through the generations.
What’s changed? Lump sum death benefits can continue to be paid to any nominated individual or trust. But the new rules no longer restrict a continuing pension income to a dependant. Pension savings can now be passed to any nominated individual (but not a trust) to draw an income from, while remaining in a tax privileged pension wrapper via an inherited drawdown fund. Once a drawdown fund has been created for a nominated beneficiary, they can access the pot at any age, drawing as much or as little as they choose. And they can nominate their own beneficiaries to inherit the pension pot on their death. This allows pension wealth to be cascaded down the generations, with fully flexible access, and without ever forming part of an estate until it is paid out.
Age at death now determines the tax treatment of pension death benefits. On death before age 75, any pension death benefits can be paid tax free. This includes any nominations in favour of a bypass trust. On death from age 75 the beneficiary pays income tax on the money they draw, whether this is taken all in one go, or as a series of income payments. Careful planning can therefore minimise the tax that has to be paid. Bypass trusts cannot be nominated for income, and so can only benefit from a lump sum, which will always be taxed at 45%. For individuals the same tax treatment applies to both income and lump sums provided on death (For 2015/16 only, non-drawdown lump sums will be taxed at a flat rate of 45% on death after age 75). So much has changed that it will require a reassessment of what would happen in the event of the death of a pension plan holder. The most suitable option, or combination of options will depend upon the personal circumstances of the plan holder. If you are hoping to leave a flexible legacy to family members from your pension, you need to check that that you have everything in place to make that happen.