What Happens To Pension on Death April 2015

What Happens To Pension on Death from April 2015?  How Your Pension Fund Paid Is Out To Spouse/Dependants on Death

Transcript:

"Hello there. Right, so pension death benefits. There’s a lot, obviously a lot going on with pensions flexibility and the Treasury have published now and we’re now to October 2014 at the time of shooting this video. They’ve published now the revised measures for pension schemes and pension scheme distribution of death and quite flexible to be fair.

So, first things first, what I am going to do is just cover the old and the new rules so:

Before age 75, so the long the short, is currently, and I’m ignoring annuity, an annuity purchase because that's different but with the drawdown rules and paying pension lump sums.

So we all know that for a pension scheme that has not had any benefits taken whatsoever on your death those proceeds can be paid out tax-free to your beneficiaries, to your loved ones, okay?

Now, that’s all well and good.  Let's say you've moved across and you're now drawing benefits from your pension fund in some form of drawdown scheme so:

The current rules if you are now in drawdown: on your death, your dependents have an option of:

1. Taking the whole of the fund out but with a 55% tax charge or
2. Have the option to continue drawing an income from the fund or indeed buying an annuity but paying then normal rate of income tax

So, e.g. you’ve taken your pension, you had your lump sum, you’re in drawdown you then die either a 55% tax charge if your surviving spouse/dependent wants to take the whole fund out or they can continue to take pension income from the fund but pay normal income tax.

Under the new rules, the new rules now say, which are due to start in April 2015:  You’re in drawdown, you then pass away and your beneficiaries

1. They can take your whole fund out as a lump sum with no tax to pay, would you believe? or
2. Alternatively, they can continue to draw an income from the fund but if they keep drawing it out as flexible drawdown, no tax to pay.
3. If they, effectively, converted to annuity then, there would be tax to pay

I have’nt seen the small print exactly on that, but the ‘long and the short’ here is for people below the age of 75:  if you’ve crystallised [i.e. taken] your pension benefit with flexible drawdown and then you leave that money to your dependents, to your beneficiaries, on your death they can potentially draw it all out tax-free or draw it out in dribs and drabs tax-free.

So massive, massive flexibility and a major bonus, a major incentive, for us to tax plan effectively and to save in pension.

[So] if we move this on to what about if you are over the age of 75?  Again, the same basic rules apply for over age 75s currently so:  If you're in drawdown and you then pass away and you’re over age 75, your dependent beneficiary can

1. Elect to take the whole fund out as a lump sum, 55% tax charge or
2. They can elect to continue to receive an income or buy annuity and subject to normal income tax for them

Now, if, under the new rules now, over 75, in drawdown and pass away: if your dependent decides to take the pension fund all out as a lump sum on your death then the tax charge reduces from 55% to 45% but then in 2016-17, that reduces yet further where it will be a marginal rate of tax.

So initially 55% going down to 45% if you're dependent decides to take your whole drawdown fund out as a lump sum.  55% going down to 45% and then going down to your marginal rate of tax.  No what I mean by marginal rate is: you'll be taxed in tiers, so if you are a low earner or a low pension income person and you pay no tax but then drawing down the whole fund, even adding that to your income still keeps you within the basic rate tax, then 20% income tax to pay.  If it takes you into the higher rate tax bracket, some of it will be taxed at 20%, some will be taxed at 40%.  If it moves on and even higher then clearly you're moving up into the higher tax brackets.  So that's that.

In terms of the taking as an income again, same rules again, your surviving, surviving beneficiary over age 75, if you died over age 75, they can continue to take all of the income just continue receiving as an income rather than taking it aa a lump sum and get taxed as normal.

Other things that I would add, the difference at the moment is currently those beneficiaries must be dependent beneficiaries.  So, what I mean by that, maybe your spouse, your husband, your wife, [your civil partner], who is financially dependent on you and they can inherit your drawdown scheme. So it’s only really close relatives that are financially dependent on you.

Under the new rules, you can leave it to anybody.  So in drawdown, you can then leave your pension fund as a legacy to your children, to your grandchildren etc. not necessarily people who are truly financially dependent on you such as your husband or your wife. 

So that’s a massive, massive tax planning, estate planning opportunity where

• Yes, we can plan for retirement and pension
• Yes, we know that below age 75 if I pass away, then my loved ones can have it basically tax-free and

If I'm over age 75 and I am in drawdown and I pass away, well, my loved ones can either:

1. Having it as a lump sum where there is a marginal tax charge if you take the whole fund out as a lump sum and it goes to that marginal rate like I’ve suggested or
2. They can continue to receive an income from the fund and get taxed as normal

But the big, big issue is under the old regime, pretty much only your legally married spouse could inherit money and have that choice to continue the drawdown or take the lump sum. 

Under the new rules, you can leave your pension fund to anybody.

So, quite a lot to take in there but I will/I am writing an ‘in depth’ article for you to take in. Any questions, as ever, give me a call. Thanks very much for watching."

The Old and New Rules Explained

BEFORE AGE 75 - IF PENSION HAS NEVER been touched/no benefitspaid out:

• OLD RULES:  Whole Pension Fund can be paid out tax free    
• NEW RULES: Whole Pension Fund can be paid out tax free

BEFORE AGE 75 - IF PENSION HAS paid out some benefits already:

LUMP SUM PAID TO LOVED ONES    

• OLD RULES = 55% tax
• NEW RULES = Tax free

INCOME PAID TO LOVED ONES         

• OLD RULES: Financial Dependants Only (e.g. Spouse/Civil Partner).  Taxed as income  
• NEW RULES: You can leave your pension to any person now.  Any beneficiary. Does not have to be a financial dependent. Tax Free if taken via new flexible drawdown income.

AFTER AGE 75 -

LUMP SUM PAID TO LOVED ONES    

• OLD RULES = 55% tax
• NEW RULES = 45% tax (marginal rate from 2016/17).

INCOME PAID TO LOVED ONES         

• OLD RULES:  Financial Dependants Only (e.g. Spouse/Civil Partner).  Taxed as income 
• NEW RULES: You can leave your pension to any person now.  Any beneficiary. Does not have to be a financial dependent. Taxed as income.