A lot has altered concerning pensions, creating implications for wealth and tax planning. It’s good for accountants to understand what has changed to benefit themselves and their clients.
Up until 2011, the holders of pension policies were compelled to purchase an annuity at age 75 (unless they were in scheme pension or had a religious objection to the pooling of mortality risk).
If the policy-holder died, the only option available to benefit dependants would have been an ongoing income. But if the policy-holder hadn’t included this option at outset, the annuity provider would have gobbled up the pension pot.
For many, this created the unsatisfactory possibility of saving into a pension scheme for years, only to benefit an insurance company, rather than their family.
Pension update and planning opportunities webinar
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2011 pension changes
In 2011, compulsory annuity purchases were abolished.
Pension savers were given more options for how their pension could be secured after age 75 and how pension funds could then be distributed on their death.
For those who chose not to purchase an annuity, remaining funds could be used to provide a drawdown income for dependants, a drawdown pension fund lump sum or a charitable death benefit lump sum.
However, not all pension providers offered these options, and the tax position was complex and changed subject to whether funds were crystallised or uncrystallised (i.e. depending on whether an individual had called on their pension benefits or not).
If the holder had taken their tax-free cash (regardless of their age on death), their pension fund could be paid to any nominated individual as a drawdown pension fund lump sum but would be subject to a 55% tax charge! For those who had not taken their tax-free cash, they would also be subject to the 55% tax bill if they passed away after age 75!
From 2015 onwards, there were some significant changes to pension scheme legislation, not only around death benefits but also changes to contribution limits, the lifetime allowance and, importantly, retirement options.
The death benefit scenario is now much simpler with the age of death determining the tax position, rather than whether funds were crystallised or uncrystallised. Most schemes (but not all) offer the following options for beneficiaries on death, so it is important to review your own plans individually:
- Lump-sum death benefit
- Dependants’ / nominees’ drawdown
- Dependants’ / nominees’ annuity
- Charitable lump sum death benefit
- Annuity purchase
The tax position is subject to the age of death:
|Death Pre-75||Death Post-75|
|Funds can be paid to nominated beneficiaries free of income tax. Funds need to be paid within certain timescales.||Funds can be paid to nominated beneficiaries, subject to income tax at the beneficiaries’ marginal rate(s) in the year of withdrawal.|
The flexibility introduced in 2015 has meant pensions remain a tax-efficient vehicle for retirement saving, but they have become a cascading pension holdings method to the next generation.
Their role in estate planning and inheritance tax is of much more value now to help look after the family and the next generation.
But one thing has not changed, the requirement to ensure expression of wish forms are completed to ensure the pension provider is aware of who your nominated beneficiaries are.
How accountants can benefit
Accountants can benefit from deepening their understanding of pensions in several ways.
If a client passes away without adequate planning, the value passed to their beneficiaries could be reduced significantly. But if the accountant can help them protect their assets, wealth will be cascaded down through the family. Often this will result in future work in the form of tax advice and ongoing services.
A lot of people are unaware of what is at stake. Accountants who look out for their clients’ interests by alerting them to the risks and opportunities can earn a great deal of kudos. And they will cement their position as trusted advisors.
More about pensions
AAT will be hosting a Pension update and planning opportunities webinar in partnership with Mattioli Woods on Thursday 18 February 2021. It will also be available on-demand for a period afterwards. Click here to register.
Jack Silk is AAT Comment’s news writer.