Updates

The importance of getting the expression of wish right

April 2015 saw the most radical changes to private pensions for a generation. Following the introduction of pension freedoms, there has been a dramatic change in how pension death benefits are taxed with increased flexibility to cascade pension wealth tax efficiently.

Most (though not all) pensions will not form part of the deceased’s estate on death and will not be liable to inheritance tax. We believe pension death benefit planning has become more important than ever.

Before considering how pension benefits are taxed upon death, we should remember that pensions do not conform to the normal principles of inheritance tax planning, as follows:

  • There is no need to make outright gifts and live seven years.
  • Once reached age 55, pension monies are accessible until death.
  • As funds are not generally subject to probate, pension funds are generally accessible without having to wait for probate to be finalised.

Pension death benefits could be subject to income tax in the hands of the beneficiary, depending on the age when the policyholder dies:

  • Death before age 75 – any beneficiary can inherit the pension funds and there is no tax charge whether taken as an income or lump sum, providing that income is designated and lump sums are paid within two years.
  • Death at or after age 75 – any beneficiary can inherit the pension funds either as an income or a lump sum. Both would be taxable at the beneficiary’s marginal rate.

By completing an Expression of Wish Form this will ensure the proceeds of the pension, subject to the trustee’s discretion, are paid to the chosen beneficiaries on death. What is also vital, is allowing the trustees some flexibility in provision of death benefits by naming all future potential beneficiaries, for example, spouse and children.

General thinking is that if they are not named, the trustees still have the discretion to pay benefits to them, but they would have to be as a lump sum with potential income tax liabilities and with the balance of funds then sitting within the beneficiary’s estate for the purposes of calculating their own inheritance tax liability. Naming them means that they could benefit from a larger percentage of the fund, if appropriate. They can have benefits paid to a successor drawdown account and retain the funds within a pension, with the flexibility to take the proceeds when it suits them, potentially reducing income tax liabilities. The funds also remain outside of their own estate for the purposes of calculating inheritance tax.

Getting the expression of wish right on your pension and having a pension that can facilitate successor and nominee drawdown could save you both inheritance and income tax.

This is just one element of our regular discussions with our clients, making sure that their planning keeps up with the latest changes and with their wishes.

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