for financial advisers only
Adrian Walker looks at the death benefit implications of the new income withdrawal regime.
The beginning of the 2011/12 tax year saw significant changes to the tax charges on death benefits from registered pension schemes. These changes, aligned to the increased retirement flexibility also now available, bring new advice issues and financial planning opportunities with clients potentially affected.
Clients can now defer taking any retirement benefits until after their 75th birthday, still have a pension commencement lump sum available to them, and continue to take income withdrawals, through both capped and flexible drawdown, beyond that age (subject to their pension arrangement having this flexibility).
However, there are issues that this flexibility raises. One thing is certain – we are not immortal – we will die. There are two options available from the remaining funds on death:
The table below summarises the current tax treatment of the lump sum death benefits from pension rights built up in registered pension schemes.
The provision of a dependant’s pension does not incur a tax charge other than the normal PAYE income tax, which ordinarily applies to pension income.
However, the 55% tax charge on funds held in income withdrawal for clients who die before age 75 brings into focus alternative planning ideas to reduce the potential tax liability on the capital value. Some thoughts to consider for clients in this area of the market are:
These changes give the opportunity to review how previous planning recommendations may need to evolve for clients in these market segments. They highlight once again the importance of independent financial advice on such complex planning issues.
This article is based on Skandia’s interpretation of the law and HM Revenue & Customs practice as at November 2012. We believe this interpretation is correct, but cannot guarantee it. Tax relief and the tax treatment of investment funds may change.
This site is designed for and directed at financial advisers and must not be relied on by anyone else.
THIS WEBSITE IS FOR FINANCIAL ADVISERS ONLY
The content of this site is approved for use by financial advisers only. It hasn't
been approved for customers to view.
If you are NOT a financial adviser, please click
here to return to Skandia's homepage.