Over 1/2 million free-resource-downloads and-counting
Pensions and Death Benefits – CII AF3, R04, J05

Pensions and Death Benefits – CII AF3, R04, J05

Death Benefits

In our last three articles on the pension decumulation rule changes that came into force from 6 April 2015, we took a look at the new flexi-access drawdown and uncrystallised funds pension lump sum (UFPLS) retirement options, and at the money purchase annual allowance. In this article we will now take a look at how death benefits have changed as a result of the increased pension flexibility at retirement.

The new rules apply to payments made on or after 6 April 2015 regardless of the date of death. So where payment of death benefits has been delayed until after 5 April 2015, the beneficiaries are able to take advantage of the new rules.

The following table compares the position before and after 6 April 2015:

Death BEFORE age 75

 

Old rules

New rules

Lump sum
  • Tax free
  • or 55% tax charge if death occurs in drawdown
  • Lump sum option available to any beneficiary
  • Tax free
  • Where death occurs before age 75, the lump sum must be paid out within a two year window otherwise there will be a 45% tax charge
  • Lump sum option available to any beneficiary
Income
  • Taxed as income at the beneficiary’s marginal rate
  • Income option available only to dependants
  • Tax free if income taken via an annuity where the member /previous recipient dies before age 75
  • Tax free if income taken via flexi-access drawdown
  • Where death occurs before age 75, the funds must be designated to an income producing contract within a two year window otherwise the income will be taxed at the beneficiary’s marginal rate of income tax
  • Annuities and income taken via flexi-access drawdown are now open to any beneficiary (dependant/nominee/successor)
  • Scheme pension however will still be taxed at the beneficiary’s marginal rate – and is still only available to dependants

 

Death On or AFTER age 75

 

Old rules

New rules

Lump sum
  • Entire lump sum subject to 55% tax including funds in drawdown
  • Subject to 45% tax
  • However, will be taxed at marginal rate from April 2016
Income
  • Taxed as income
  • Option available only to dependants
  • Will be taxed at the beneficiary’s marginal rate if income taken via an annuity/flexi-access drawdown/a scheme pension where the member/previous recipient dies on or after age 75
  • Annuities and income taken via flexi-access drawdown are now open to any beneficiary (dependant/nominee/successor)
  • Scheme pension still only available to dependants

 

From 6 April 2015, in the event of the death of a member of a defined contribution scheme (who does not have a scheme pension), the pension can now be paid to any beneficiary nominated by the member (the nominee), and the nominee(s) can in turn nominate a successor to receive a pension in the event of their death.

Please note that uncrystallised funds pension lump sum (UFPLS) is not available as a death benefit option. Also note that the lifetime allowance applies under both the old and new rules, so when lump sum death benefits are paid on the member’s death before age 75 they will be tested against the lifetime allowance, and any excess will be subject to the lifetime allowance excess charge in the normal way. However, if a beneficiary inherits a pension fund, it won’t count towards their own LTA.

Taken with all the other pension flexibility rule changes that came in from April 2015, these changes create a genuine incentive to save, knowing that family members can benefit from the remaining fund.

Grab the resources you need!

If you’re studying for your CII AF3 exam, and you’re wondering how you’ll ever manage a pass, grab our free taster to try out one of Brand Financial Training’s mock exam papers for yourself.  Click the link to download the AF3 mock exam taster now!

Click here to download our free taster mock paper for CII AF3

Alternatively, you can download the taster for R04 or J05 if one of those exams is causing you worry.

Over to You…

What do you think of the new rules regarding death benefits? Please let us know what you think by leaving a comment!

Related Articles:

Pension Flexibility – The New Drawdown Regime – CII AF3, R04 and J05

A Look at the Uncrystallised Funds Pension Lump Sum (UFPLS)

Money Purchase Annual Allowance (MPAA) – CII AF3, R04, J05

Annuity Rule Changes – CII AF3, R04, J05

0 Comments

Leave a reply

Your email address will not be published.