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

2. 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

3. pension death benefits
The options

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

5. 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

6. 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

7. 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

8. 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?

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

10. 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

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

12. pension death benefits
taxation

13. 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

14. Pension DEATH BENEFITS
TAXATION
CRYSTALLISED Pension fund
Member
Death before 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

15. 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

16. pension death benefits
Inheritance tax

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

18. 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

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

20. 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

21. 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

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

23. pension death benefits
Spousal bypass trusts

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

25. 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

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

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

28. 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

29. 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 It provides life assurance and pensions. Registered in England and Wales, company number 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 Registered in England and Wales company number Registered office: 55 Gracechurch Street, London, EC3V 0RL. RL Corporate Pension Services Limited, registered in England and Wales, company number Registered office is at 55 Gracechurch Street, London EC3V 0RL.
December 2018| PR P PN 0035