Financial planners speak: Is your current scheme the best for pension death benefits?
According to many financial planners, this government has changed more with respect to pensions than any other in a century. Greater pension flexibility has seen anybody over the age of 55 now able to withdraw any amount of money from their pension pot whenever they like.
However, there have also been changes to the way your financial legacy is passed down to your family members when you die. It’s therefore vital that you assess your existing pension scheme with your financial planner to see whether it meets your criteria.
A vast improvement of tax treatments…
The new tax treatment of pensions on death has vastly improved for those paying benefits after the 6th April 2015 – the pension reforms day. Here is a breakdown of the new tax charges from a drawdown pension fund:
- Passed on by lump sum: If you die under the age of 75, your savings will not be taxed as it is passed on. If you’re over 75, the rate of tax paid will be subject to 45% tax for payments made between 6th April 2015 and 6th April 2016. Payments made after 6th April 2016 are taxed at the beneficiary’s rate of income tax.
- Passed on as income: the beneficiary decides whether to receive the total sum as an annuity or as a drawdown – both are tax-free. If you die over the age of 75, both annuity and drawdown options are taxed as income, just as when passed on by lump sum.
With these new and exciting options available it is certainly worth running through your existing policy and examining whether it is worth changing to something more current.
The changes to pensions on death makes an excellent catalyst if you’re considering what should happen to your funds on your death.
From the bullet points above, you can see that there are a range of options, and no one option is best for everybody – every family is a unique case. Therefore the merits of each option must be explored.
Your UK financial planner will ensure that you cover all possibilities, and once you’ve decided on the method of wealth transfer, you should turn directly to the task of ensuring your decisions are enacted.
Ruling out your existing scheme
Before you consider any of the new options, examine your existing one. All existing pensions are capable of facilitating the new options, but not all of the existing schemes will enable them all. As an example, some older schemes might not offer inherited drawdown, and so the only available option will be an annuity payment.
Similarly, some older pension plans may not facilitate your death benefits paid into a bypass trust, so you will need your financial advisor to help you understand the limitations of your current plan.
Review your nominations
Ensuring your pension nomination is up to date is also vital. The new pension schemes now allow somebody who isn’t a dependent of the deceased to draw an income. However, unless the deceased nominated the non-dependent during their lifetime, a trustee/administrator cannot exercise their discretion and offer the non-dependent the inherited drawdown option.
A further issue with nominations can arise if you have set up a bypass trust, where some nominations to the trust can be made binding upon the scheme administrator.
Here, the scheme trustee/administrator will have the pay into the bypass trust and will not have any autonomy to pay somebody else. Nominations such as these can be revoked at any time (and you will only need to pay a nominal fee to set up a new trust).
Your financial planner is your best weapon
While waiting until closer to retirement sounds like an easy solution, it will cause you a lot of trouble and possible frustration if you do. Speak with your UK financial planner early on in the game, as you never know when an unfortunate death in the family might come.
It is better to be financially prepared early on in life, as this way you and your family can have peace of mind. Speak with one of our financial planners today.