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Canada Life Article - Making the most of new pension rules

Making the most of the new pension rules as part of estate planning


In the latest article in our series on inheritance planning, we look at how the pension freedoms from last year have brought about changes in the death benefit rules surrounding pensions. This has opened up significant opportunities for legacy planning that may not have been possible prior to April 2015. It’s very important to have an understanding of what these rule changes mean as well as their tax implications.

Choosing your nominees and successors

Under the new rules, you can nominate anyone to receive your pension lump sum or income death benefits upon death. The person you nominate doesn’t necessarily have to be a relative. This means there is the flexibility to nominate someone who is not a dependent if you wish. The person you nominate or your dependent if you chose not to nominate anyone can leave any benefits remaining on their death to a successor.

In the case of death before the age of 75, death benefits will be paid out to the nominee or beneficiary tax free: it doesn’t matter at all if how the beneficiary receives the funds, so long this is done within two years. If the nominee or beneficiary in question then also dies before the age of 75, the benefits will continue to be paid out tax free to the successor.

If death occurs at the age of 75 or over, your benefits are no longer available tax free and will be taxed regardless of whether they’ll be received by the beneficiary through drawdown or in lump sum form. The benefits will be taxed at the marginal rate of the beneficiary in question.


Spousal bypass trusts – are they still relevant?

The new rules beg the question whether spousal bypass trusts - a vehicle for spouses to pass on their benefits tax free to their dependants – are still worth considering in estate planning?

Well, in some ways, the benefits of a spousal bypass trust may still be relevant when compared to a dependant’s flexi-access drawdown:

You should be able to identify the benefits and drawbacks of using drawdown as well as a bypass trust and gauge which works better for you. The main benefit of a spousal trust is to retain more control about who gets what and when. But they also come with more complexity, which mean that financial or legal advice will be helpful.

For example, where the decision has been made to use a spousal bypass trust, in addition to the income tax and Capital Gains tax implications there will also be periodic and exit charges within the trust. The timing of these 10-yearly periodic charges is dependent on your transfer and contribution history, among other things. Making pension contributions for other family members

With the new changes, you could also choose to make contributions to other family member’s pension schemes. If the recipient of your benefits is a child or someone not working, they could receive tax relief on contributions up to £3,600 gross.

However where the recipient is working they will receive tax relief at their highest marginal rates of tax.

This way you can reduce the value of your estate applicable to IHT as well as build up retirement benefits for other family members who in turn will also benefit at tax relief at their highest marginal rates. A final checklist of things to consider during estate planning

Think about your health and life expectancy when considering the assignment of any pension benefits and ensure every now and then that your nomination of beneficiary forms are up to date. Also, consider what your objectives are and how much control you’d like the beneficiary to have over the benefits being paid out.

As part of an inheritance planning exercise, pensions can play an important part of your overall strategy and there are a number of different avenues worth exploring. Understanding not just the recent changes to the rules around pension death benefits but the more nuanced rules and tax implications around pensions in trusts can make a tremendous difference to your loved ones.

Spousal Bypass Trust
Dependant’s flexi-access drawdown
 Benefits kept out of spouse’s estate, which will be taxed
 Income taken from dependant’s drawdown will form part of spouse’s estate for inheritance tax
 Income accessed as loans/advances tax free and can be with no rate of interest
 Dependant’s flexi-access drawdown can provide income
 Trust income taxed at 45% - but beneficiary can reclaim any overpaid tax depending on their tax status.
 Dependent on member’s age at death, income can be: Paid tax-free (death under age 75) Paid at beneficiaries rate of income tax (death at age 75 or over)
 Trustees of spousal bypass trust have discretion once monies are paid into the trust.
 Trustees or scheme administrator have discretion as to whom will receive any benefit and type of benefit.
 Beneficiary has no power/influence as to who will benefit after their death.
 Beneficiary can nominate a successor to inherit drawdown plan on their death.
 Beneficiary has no power/influence as to how much money they can have or take.
 Beneficiary, once in receipt of drawdown, can access as much or as little as they want or deplete the entire fund.


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