Post April 2015: taxation of death benefits

Transcription

1 ADVISER FACTSHEET Tech Talk December 2014 Post April 2015: taxation of death benefits The Taxation of Pensions Bill was introduced to Parliament on 14 October Amendments to the Bill have been tabled that give more detail on how death benefits paid on or after 6 April 2015 will be taxed. What follows is a brief summary of the death benefit options available under money purchase arrangements and the resultant tax treatment. Under current legislation a beneficiary who is not a dependant only has access to a lump sum death benefit. Please note that the Bill is currently making its way through parliament and that the enacted legislation might be different. Contents Introduction Member dies pre 75 with uncrystallised rights Member dies pre 75 with crystallised rights Member dies post 75 with uncrystallised rights Member dies post 75 with crystallised rights Death of dependant/beneficiary Charity lump sum death benefit Comment For professional advisers only

2 Introduction The Chancellor s autumn statement contained further proposals on the taxation of inherited pensions. In particular where funds on death are used to secure a survivor s annuity. Detail will be contained in the Finance Bill 2015 and it is anticipated that the draft clauses will be available early in the new year. In view of this, comment from HMRC Policy Team has been obtained and this is reflected in the paragraphs that follow. Member dies pre 75 with uncrystallised rights Looking at each of the post April 2015 death benefit options in turn: Uncrystallised lump sum death benefit Where the lump sum is paid before the end of the period of two years beginning with the earlier of the day on which the scheme administrator of the scheme first knew of the member s death and the day on which the scheme administrator could first reasonably have been expected to have known of it, the lump sum is tax free. However, the lump sum is a benefit crystallisation event meaning it is tested against the member s lifetime allowance and any excess will suffer a lifetime allowance charge of 55%. If the lump sum is paid outwith the two year period referred to above, there is no benefit crystallisation event (therefore no possibility of a lifetime allowance charge) and the lump sum is subject to the special lump sum death benefit charge (45%). Dependant s scheme pension HMRC Policy Team advised that the intention is to leave this option unaltered. Presumably what this will mean is that this option will continue to be available to dependants only, and where funds on the death of the member are applied to secure a dependant s scheme pension, no lifetime allowance test will result and the income taken will be subject to income tax at the recipient s marginal rate. If income is taken from the drawdown fund before 6 April 2015 it will be taxed at the dependant s marginal rate of income tax and this tax treatment will apply to income payments made after 5 April However, if the first income payment is delayed until after 5 April 2015, it and future income payments will be tax free. Conversion to flexi-access drawdown on or after 6 April 2015 will not affect the tax treatment set out immediately above. Dependant s flexi-access drawdown pension Where the member s fund is designated, on or after 6 April 2015, and before the end of the two year period referred to above for the provision of a dependant s flexi-access pension, the amount designated will be tested against the member s lifetime allowance. A lifetime allowance charge will apply to any excess. Income taken from the flexiaccess drawdown fund will be tax free. If the fund is designated outwith the two year period, there is no lifetime allowance test and any income taken from the flexi-access drawdown fund will be subject to income tax at the dependant s marginal rate. Dependant s drawdown pension Where the member s fund is designated for the provision of a dependant s drawdown pension (including flexible drawdown) pre 6 April 2015, the amount designated is not tested against the member s lifetime allowance. 2

3 Beneficiary s flexi-access drawdown pension Post 5 April 2015 it will be possible for the member s fund to be designated for the provision of a beneficiary s flexi-access drawdown pension even where the member died before 6 April For the tax treatment see Dependant s flexi-access drawdown pension above. Dependant s/beneficiary s annuity As with drawdown it will be possible for a beneficiary post April 2015 to access income through an annuity. The intention is that the tax treatment will broadly mirror that for drawdown in terms of testing against the lifetime allowance and the taxation of the annuity instalments. Member dies pre 75 with crystallised rights Lump sum death benefit Where the lump sum e.g. the remaining drawdown fund is paid on or after 6 April 2015 it will be tax free provided it is paid before the end of the two year period referred to above. If it is paid outwith the two year period the special lump sum death benefit charge applies. There is no test against the member s lifetime allowance. Dependant s scheme pension The tax treatment is the same as where the scheme pension is paid from uncrystallised rights (see above). Dependant s drawdown pension The tax treatment is the same as where the pension is paid from uncrystallised rights (see above). Dependant s/beneficiary s flexi-access drawdown pension Any designation for dependant s/beneficiary s flexiaccess drawdown pension by definition can only occur on or after 6 April There is no test against the member s lifetime allowance. Income paid from the flexi-access drawdown fund will be tax free. Dependant s/beneficiary s annuity Again, the intention is for the tax treatment to broadly mirror that for drawdown. Member dies post 75 with uncrystallised rights Uncrystallised lump sum death benefit The lump sum is not tested against the member s lifetime allowance and is subject to the special lump sum death benefit charge (45% if paid on or after 6 April 2015). For lump sums paid on or after 6 April 2016 the stated intention is for the charge to be levied at the recipient s marginal rate of income tax. Any form of dependant s/beneficiary s pension There is no test against the member s lifetime allowance and the income taken will be subject to income tax at the recipient s marginal rate. 3

4 Member dies post 75 with crystallised rights The tax treatment of the lump sum and pension death benefit options are the same as for uncrystallised rights. Death of dependant/beneficiary In this section the tax treatment of the death benefits payable on the second death (and subsequent deaths) is considered, where the member s fund had been designated after their death for the provision of a drawdown pension (including flexi-access drawdown pension) and the recipient of the drawdown pension dies. There are no lifetime allowance issues in connection with the second death and the taxation of the death benefits is governed by the age of the deceased individual at that time. Following the death of the recipient s immediate predecessor and where the remaining fund is paid out as a lump sum, the lump sum will be tax free provided the predecessor had not attained age 75 at date of death and it is paid within two years of when the scheme administrator could have first reasonably known of the death. Otherwise the lump sum would be subject to the special lump sum death benefit charge. If any portion of the remaining fund on the death of the predecessor is designated for the provision of a flexi-access drawdown pension for the recipient, any income paid from the pension would be tax free if the predecessor had not reached age 75 at date of death. Where the deceased predecessor had attained age 75 the income would be subject to income tax at the recipient s marginal rate. It is expected that a similar tax treatment will apply where the remaining funds on the death of the predecessor are used to purchase an annuity for the recipient. The tax treatment of death benefits payable on the third and subsequent deaths will be governed by the same rules. Note that the age of the member on their death i.e. the first death, has no bearing on the tax treatment of benefits payable on the second and subsequent deaths. Charity lump sum death benefit The definition of the above will be extended so that it can be paid from a beneficiary s flexi-access drawdown fund where on the death of the beneficiary there are no surviving dependants of the member and it is paid to a charity nominated by the member, or if the member had made no such nomination, by the beneficiary. 4

5 Comment The line taken by previous Governments that the tax breaks given in connection with pensions were for providing income in retirement and not as a means of passing wealth on to future generations seems to have softened somewhat with these proposed changes. An obvious outcome is that advisers and their clients will be revisiting estate planning strategies. Also, a knock on effect of the changes is that holding illiquid assets e.g. commercial property in a pension will become less of an issue for individuals. The availability of income for beneficiaries and the absence in certain circumstances of a tax charge on lump sum death benefits means that where property is involved, rent from the property could be used to meet income requirements and ownership of the property could be transferred to settle the liability in respect of a lump sum death benefit. With these tax changes coming on top of the pension freedoms due to take effect from April 2015, even with the statutory override at their disposal, pension providers looking to offer members the flexibility afforded by the new legislation are facing a busy few months making the necessary system and procedural changes. Further information John Dunn Pension Specialist Technical Support Unit Please contact the Technical Support Unit with any further queries on: Pension Technical Support: pensions.techsupport@jameshay.co.uk Please note that every care has been taken to ensure that the information provided in this article is correct and in accordance with our understanding of current law and HM Revenue & Customs practice. You should note however, that James Hay Partnership cannot take upon itself the role of an individual taxation adviser and independent confirmation should be obtained before acting or refraining from acting upon the information given. The law and HM Revenue & Customs practice are subject to change. The tax treatment depends on the individual circumstances of each client. James Hay Partnership is the trading name of James Hay Insurance Company Limited (JHIC) (registered in Jersey number 77318); IPS Pensions Limited (IPS) (registered in England number ); James Hay Administration Company Limited (JHAC) (registered in England number ); James Hay Pension Trustees Limited (JHPT) (registered in England number ); James Hay Wrap Managers Limited (JHWM) (registered in England number ); James Hay Wrap Nominee Company Limited (JHWNC) (registered in England number ); PAL Trustees Limited (PAL) (registered in England number ); Santhouse Pensioneer Trustee Company Limited (SPTCL) (registered in England number ); Sarum Trustees Limited (SarumTL) (registered in England number ); Sealgrove Trustees Limited (STL) (registered in England number ); The IPS Partnership Plc (IPS Plc) (registered in England number ); Union Pension Trustees Limited (UPT) (registered in England number ) and Union Pensions Trustees (London) Limited (UPTL) (registered in England number ). JHIC has its registered office at 3rd Floor, 37 Esplanade, St Helier, Jersey, JE2 3QA. IPS, JHAC, JHPT, JHWM, JHWNC, SPTCL, SarumTL and IPS Plc have their registered office at Trinity House, Buckingway Business Park, Anderson Road, Swavesey, Cambs CB24 4UQ. PAL, STL, UPT and UPTL have their registered office at Dunn s House, St Paul s Road, Salisbury, SP2 7BF. JHIC is regulated by the Jersey Financial Services Commission and JHAC, JHWM, IPS and IPS Plc are authorised and regulated by the Financial Conduct Authority. The provision of Small Self Administered Schemes (SSAS) and trustee and/or administration services for SSAS are not regulated by the FCA. Therefore, IPS and IPS Plc are not regulated by the FCA in relation to these schemes or services.(01/14) JHSTT 02 DEC14 LD