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Technical View

Technical View

Your Questions Answered

Welcome to this month’s Technical View, where we will be focusing on some recent questions received by the Technical e-helpdesk, in the hope that it will help you with some queries you receive.

As always, we hope that these monthly newsletters will provide an informative insight and will be valuable for when you meet clients with similar scenarios.

If any of your colleagues would like to receive our newsletters, please e-mail us and we will be delighted to include them in our future communications.

Question 1 

Taking into consideration the payment of pension death benefits post April 6 2015, could you please provide clarification on the following points:

  • If the pension scheme member died before the age of 75 would the pension, crystallised or uncrystallised, pass tax free into a Bypass Trust?

  • What then would the taxation position be if the pension member died post 75 and the death benefits were paid into a Bypass Trust? 

Answer 1

  • If the scheme administrator exercises discretion to pay to the trust, normally payment of a lump sum death benefit payable on death before the age of 75 would be paid free of tax.

  • In these circumstances, if a single lump sum death benefit is paid to a spousal bypass trust in the tax year in 2015/16 the tax charge would be 45%. If a single lump sum is paid in tax year 2016/17, or beyond, as we understand, this will be subject to the Trustees’ rate of tax.  Note - it won’t be possible to nominate a trust for flexi-access drawdown as this has to be an individual. 

Question 2

A client aged 67 has a SSAS with a current value of £1.3m, (with fixed protection up to £1.5m) and would like to pass this to the children untouched as the total estate is in excess of £10m. When the new pension rules come into force in April, would it be correct thinking that if the client passed away before 75 then this could be passed to the children tax free and post 75 at the children’s marginal rate of tax?

Answer 2

Firstly, it needs to be established under which pension rules, i.e. defined contribution (DC) or defined benefit (DB) the SSAS is governed and what flexibility will be available under the SSAS. This can be done by requesting a copy of the scheme rules from the SSAS provider.

Assuming it is a DC scheme, it then needs to be established whether the scheme offers all the flexibility that is being introduced from 6 April 2015. Assuming it does there are several possible options from 6 April 2015 regarding death benefits.

  • If the member dies before the age of 75, they will be able to pass their pension pot to nominated beneficiaries tax free. The beneficiary can then access the pension savings either as a single lump sum payment or as a series of lump sum payments through flexi-access drawdown (FAD). Both of these options are free from inheritance tax (IHT) as long as the lump sum payment is made, or the FAD fund is set up, within 2 years.

  • If the member dies at or over age 75, they will still be able to nominate beneficiaries to whom they can pass on their remaining pension fund. If this is accessed through FAD, or paid as a single lump sum the beneficiary will pay tax at their marginal rate, as due to the age of the client, this would be post 2016/17 tax year when the tax charge changes.

Any payment of death benefits to an individual will normally be free from IHT but once received by the individual it would form part of their estate. Depending upon the personal circumstances and the available nil rate band at the time, this could potentially cause an IHT liability for the recipient.

Question 3

A client who has recently started working in Qatar has a Friends Life personal pension which his UK registered company is currently contributing to. The client is 56 and is currently a non-UK taxpayer but will reside permanently in the UK at retirement in approximately 9 years time.  

A company approached the client trying to get them to move their pension to a QROPS pension scheme as they have said that if he passes away while working abroad the pension would pass to his wife but minus 55% tax charge.

My main queries are:

  • Can his current UK registered company pay into his pension with him working outside of the UK?

  • Will his current UK pension incur a 55% tax charge on his death regardless of how it is passed to his wife?

Points to consider regarding death benefits from 6 April 2015

  • Nominated beneficiaries receiving FAD can name their successors to receive the FAD fund on their death so the fund can continue to be passed on.

  • The rate of tax payable on “inherited” pension funds is based on the age at death of the last drawdown beneficiary. So if for example the original fund was subject to tax as the member was over 75 when they died, if the successor to this fund is under 75 when they die, any subsequent successor will be able to receive payments tax free.

  • As these changes allow for anyone to receive FAD as well as a lump sum death benefit, it is important that beneficiary forms are reviewed to ensure they reflect the client’s circumstances and wishes. This is a great opportunity to revisit your pension clients.

  • A bypass trust may be suitable for the pension death benefits to be paid into and perhaps have the children as beneficiaries. The funds are then put in control of the members chosen trustees. These trustees can then distribute to the beneficiaries as and when they see fit. Age at the date of death will also be a factor as will any periodic/exit charges on the funds held in the bypass trust, compared with leaving the funds in the pension arrangement and the beneficiary taking income from there.

Finally, a question to ponder; if death occurs before the age of 75, would tax free income be more beneficial than a tax free lump sum, which is then placed in a taxable environment?

Hopefully this edition has provided some answers for you on similar queries you may have. If you have further queries on the content of this edition or other technical queries then please contact the Technical e-helpdesk at technical@sanlam.co.uk.

Date Issued: January 2015

This note is to be used by Financial Advisers only. It is not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document is based on current tax law and HMRC practice as at January 2015 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should be always sought.

Past performance is no guarantee to future performance. The value of investments can fall as well as rise so investors could get back less than they invest.

Sanlam & Sanlam Investments and Pensions are trading names of Sanlam Life & Pensions UK Limited (SLP (Reg.in England 980142)) and Sanlam Financial Services UK Limited (SFS (Reg. in England 2354894)). SLP is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. SFS is authorised and regulated by the Financial Conduct Authority. Registered Office: St. Bartholomew’s House, Lewins Mead, Bristol BS1 2NH.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.