RETIREMENT REVOLUTION April 2015 DEATH IN RETIREMENT. Less tax and more choice! The new pension benefits rules will have people giving more thought on how they can provide a legacy from their remaining pension. The changes from 6 April have seen pensions become far more inheritable than ever before! THE SITUATION In this article we consider the position of Paul & Patricia Brown. You may remember that in our January article we looked at Paul’s desire to cash in his pension fund and purchase another buy-to-let property. Thankfully Paul had a ‘change of heart’, and after our advice, decided to keep his pension fund invested. Having recently lost a close friend, Paul has now come back and asked us to explain to him what would happen to his pension fund if he were to pass away. The new pension freedom rules introduced in April now mean that Paul’s beneficiaries would not now be put in such a draconian position when Paul passes away. Firstly let’s look at the old position - & then compare that to the new. OUT WITH THE OLD! Previously, anyone who died under the age of 75 would have left beneficiaries with a tax problem. Any benefits that had not been drawn upon - often known as uncrystalised benefits - would have still been paid tax-free, however, any benefits that had been touched - known as crystalised benefits - would have been taxed at 55% if taken as a lump sum, or at a beneficiaries marginal tax rate if taken as income. Those 75 or older at the time of death would have suffered even more. Whether uncrystalised or crystalised, any benefits would have been taxed at a whopping 55% if taken as a lump sum - including any tax free cash that had not been taken. IN WITH THE NEW - A DOUBLE BOOST! There are two significant changes to defined contribution (DC) pension death benefit rules from 6 April. • Who can benefit? Lump sum death benefits can continue to be paid to any nominated individual or trust. No change there. But the new rules no longer restrict a continuing pension income to a dependant. Pension savings can now be passed to any nominated individual to draw an income from, while remaining in a tax privileged pension wrapper via an inherited drawdown fund - eg: children, grandchildren, siblings, etc. More info : • The tax they pay! Age at death now determines the tax treatment of pension death benefits. There is no longer any taxation distinction between benefits provided from crystallised and uncrystallised* funds (* -other than the need for a Lifetime Allowance (LTA) test against the latter). o On death before age 75, any pension death benefits can be paid tax free. o On death at 75+, the beneficiary pays income tax on the money they draw, whether this is taken all in one go, or as a series of income payments. NOTE: any claims for lump sums during the 2015/2016 tax year will be subject to a transitional rate of 45%. It is proposed that marginal rates will be adopted in future years. So, depending on a beneficiary's tax status, benefits could be taxed anywhere between 0% and 45%. More info : So what will this mean for Paul? So much has changed that it will require a reassessment of what Paul would like to happen to his pension fund. • Will it be better to leave pension wealth to family members via an inherited drawdown arrangement? • Is a bypass trust still an attractive option for passing on pension death benefits? Paul’s family situation is that he is married to Patricia, and they have 2 adult children Colin & Clare. Although both Colin & Clare are married, Colin is currently going through a difficult time with his wife Chloe. Clare is also married - thankfully happily - and has 2 children - Peter & Phoebe. Paul’s concerns regarding the potential inheritors of his Estate has prompted a discussion with us. Paul’s prime concern is to make sure that Patricia is financially stable in the event that he should pre-decease her, but also in the back of his mind is the fact that his son Colin is currently having marital problems, and as much as he is fond of his daughter-in-law, he is not keen for her to benefit financially in the event of his passing. (Ie: Paul dies, Patricia doesn’t change the nomination before she dies, Colin is still married to Chloe, Chloe could benefit.) That’s not what Paul wants! What to do! The answer to these questions will of course come down personal circumstances. And the choice needn't be ‘either or'. For example, Paul can request that part of his fund on death is nominated to certain family members and the rest to others These nominations can be amended as many times as required to meet Paul (and his families) changing circumstances. What is clear, is that anyone currently nominating their pension into a bypass trust should seek independent financial advice to fully understand how the new rules could impact on their nomination. What is also very clear to us is that pension plans have (almost) overnight become an extremely tax efficient way to pass benefits down through the generations, & what needs to be considered is that why would someone take benefits from a pension fund if they had other sources for those benefits? Need some help or want more information? Please call or email .