Pension Death benefits Facts and planning Justin Corliss, Senior Business Development Manager 12 December 2018

Pension Death Benefits Learning objectives By the end of this session you will be able to: Identify what death benefit choices are available Explain the taxation of death benefits Understand the impact of IHT on death benefits Describe spousal bypass trusts and how they work

pension death benefits The options

Pension Death benefits How it works Scheme rules rule…. Schemes may not allow full flexibility Schemes are not all discretionary

Pension DEATH BENEFITS HOW IT WORKS Original DC Pension Dependant or nominee(s) ? Lump sum or annuity Yes Death of member Lump sum or annuity ? Scheme administrator will nominate No Yes Dependants or nominee ‘s FAD No Lump sum or annuity No Death of nominee

Pension DEATH BENEFITS HOW IT WORKS Original Pension Death of member Lump sum or annuity Dependants or nominee’s FAD Death of dependant or nominee Successor’s FAD Lump sum or annuity Death of survivor Successor’s FAD Lump sum or annuity Death of survivor

Pension DEATH BENEFITS WHO CAN GET WHAT Beneficiary Options   Dependant Lump sum and/or income Nominee No Dependant or Nominee Scheme administrator discretion Anyone else but Dependant exits Lump sum Income

Pension Death benefits Expression of wish 24/7 access to online service Who do you want to receive benefits? What do you want to give? Do the scheme rules allow it?

Pension Death benefits Expression of wish Planning Point: Make sure expression of wish forms regularly reviewed especially if separation/divorce/remarriage

Pension DEATH BENEFITS HOW IT WORKS Original Pension Death of member Scheme Administrator discretion Direction/Binding nomination Gather evidence Nominated beneficiaries receive funds according to rules IHT issues? Chosen beneficiaries offered death benefits according to rules

Pension Death benefits Scheme rules rule Planning Point: Check how scheme is set up

pension death benefits taxation

Pension DEATH BENEFITS TAXATION UNCRYSTALLISED Pension fund Member 1st Death Death before 75 and paid within 2 years – no income tax but LTA test after 2 years – income tax at recipient’s marginal rate of tax or special lump sum death benefit charge of 45% for a non- individual but no LTA test Death after 75 - income tax at recipient’s marginal rate or special lump sum death benefit charge of 45% for a non- individual but no LTA test

Pension DEATH BENEFITS TAXATION CRYSTALLISED Pension fund Member Death before 75 - no income tax * and no LTA test Death after 75 - income tax at recipient’s marginal rate or special lump sum death benefit charge of 45% for a non- individual but no LTA test * Lump sums from crystallised funds must meet the 2 year rule or they are taxable

Pension DEATH BENEFITS TAXATION - responsibilities Scheme PRs HMRC Beneficiaries Tell PRs LTA used Notify HMRC of excess Issue bill to Beneficiaries Decide on death benefits

pension death benefits Inheritance tax

Pension Death benefits TAXATION - IHT Pension Estate subject to IHT Estate subject to IHT Pension

Pension Death benefits TAXATION - IHT The pension vs discretionary trust Trust Pension Putting money in During At the end 20% over NRB Normally exempt Up to 6% Exempt Total of 40% Normally exempt

Pension Death benefits TAXATION - IHT When does IHT apply? 1 Contributions 2 Annuity guarantees 3 Estate entitled to benefit/power of disposal 4 Transfers

Pension Death benefits Example - how IHT might work on transfer Mark lives in England, is terminally ill and divorced He has 2 adult children He transfers his DB pension to a DC scheme and dies 2 months later The transfer of value is £1 million

Pension Death benefits Example – how iht might work on transfer Before figure – this depends on the open market value (high as death was soon after transfer) HMRC state it to be £980,000 After figure – calculated using an UFPLS 25% of £1m taxed at 0% = £250,000 Income tax of 45% of £750,000 (other taxable income of £150,000) =£337,500 Value of retained rights £1m - £337,500 = £662,500 Before figure – After figure = £980,000 - £662,500 = £317,500 IHT Charge: £317,500 x 40% = £127,000 Not 40% of £1m Loss to the estate

Pension Death benefits Iht Planning Point: Could there be an IHT impact? What is the impact?

pension death benefits Spousal bypass trusts

Pension Death benefits Spousal bypass trusts Why might you use one? 1 Control 2 Tax 3 Other reasons

Pension DEATH BENEFITS SBT – TAXATION post 75 Original Pension Death of member Pay to trust – SLSDB charge of 45% deducted Pay to individual – marginal rate deducted Trust pays to beneficiary with reclaimable tax credit ? Beneficiary claims tax back from HMRC

Pension Death benefits Spousal bypass trusts Planning Point: Is a SBT appropriate?

Pension death benefits Trigger points 1 2 3 Type of scheme Life events IHT

Pension Death Benefits Learning outcomes By the end of this session you will be able to: Identify what death benefit choices are available Explain the taxation of death benefits Understand the impact of IHT on death benefits Describe spousal bypass trusts and how they work

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales, company number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Marketing Limited is authorised and regulated by the Financial Conduct Authority and introduces Royal London’s customers to other insurance companies. The firm is on the Financial Services Register, registration number 302391. Registered in England and Wales company number 4414137. Registered office: 55 Gracechurch Street, London, EC3V 0RL. RL Corporate Pension Services Limited, registered in England and Wales, company number 05817049. Registered office is at 55 Gracechurch Street, London EC3V 0RL. December 2018| PR P PN 0035