Death Benefits

MasterClass

Build your CPD with technical expertise from our CII accredited MasterClasses.

Video looking at Death Benefits

Watch the latest CII accredited MasterClass from our Financial Planning and TechTalk team and add to your CPD learning. In this recorded MasterClass from 24 September we share our technical guidance focusing on death benefits.

By the end of this masterclass you will be able to explain;

  • The money purchase death benefit changes in 2015
  • The lump sum and income options for pension death benefits
  • The key differences between money purchase and final salary death benefits.
  • Company: Lloyds Banking Group – Lloyds           

    Conference Title: Scottish Widows Masterclass Conference Call

    Moderator: Andrew Gill              

    Date: Tuesday, 24th September 2019      
    Conference Time: 10:30am UK

     

    Operator: Good day and welcome to the Sottish Widows Masterclass Conference Call.  Today's conference is being recorded.  At this time, I would like to turn the conference over to Mr Paul Rutkowski, Financial Planning Senior Manager.  Please go ahead sir.

    Paul Rutkowski: Thank you very much.  Good morning and welcome to the Scottish Widows CII Accredited Tech Talk Masterclass on Pensions death benefits. Today, I'm joined by Bernadette Lewis and Tom Coughlan from the Scottish Widows financial planning team who will shortly be taking us through the presentation.  At the conclusion of the presentation you will hear where you can find and access further information covered in today's slides. As you will be aware, the objective of these presentations is to provide you with valuable insights into topical areas of pension planning.  With the pension freedoms well-established, many clients will be accessing their pensions via flexi-access drawdown.  As well as benefitting from freedom and choice they will also be giving some thought to how their family will benefit from their retirement benefits when they die.  The tax treatment and availability of money purchase death benefits was enhanced under the recent reforms and this is what we will focus on in today's presentation.

    In addition to the freedom and choice reforms, the ongoing Staveley case and increased volumes of defined benefits transfers has maintained the industry’s interest in the tax treatment of death benefits, the added inheritance tax benefits of personal pensions should help to maintain this interest well into the future.  Death benefits, their income tax treatment and inheritance tax aspects represent an enormous topic.  We cannot cover all aspects comprehensively today, so have chosen to focus on the more interesting and relevant aspects such as effective use of nomination forms and the viability of bypass trusts.  If a particular aspect of the rules is not covered, please feel free to submit a question using the Q&A facility and we will endeavour to answer it at the end.

    We do have a range of detailed technical content on all aspects of pensions, tax and legislation such as death benefits including accredited CPD guides, Tech Talk articles and a number of tax calculators which can all be accessed via the Scottish Widows Adviser Extranet Website.  Today's presentation will last for about 45 minutes, including time to answer any of the questions that you have raised throughout.  Full details of how you can ask questions will again be given out at the end, but as I said, you can ask online as we go along.  The presentation will be recorded and available for subsequent review via the Scottish Widows Adviser Extranet Website and CPD certificates will also be issued for those who are attending live.  I'd now like to hand the call over to Tom to continue;

    Tom Coughlan: Thank you Paul.  Good morning everyone.  As Paul mentioned, today's presentation is about pension death benefit but a particular focus on money purchase, death benefits and the tax and availability of those death benefits. So that was improved considerably in 2015 alongside the freedom and choice reforms and other things that have continued to keep death benefits in people's minds. So, the DB transfer market and the ongoing court case, Staveley.  So, we'll look at defined contribution death benefits, and where they contrast with those available under a defined benefit scheme. We'll look at nomination of beneficiary forms under DC schemes, and then we'll look at specifically the different types of death benefits available. So, the pension income options, which are drawdown and annuity, the lump sum options. Then, we'll look at some of the inheritance tax aspects as well. So, bypass trusts, the Staveley case and how a drawdown can be used for IHT planning purposes. And then at the end, we'll go through any questions that you've submitted and try and answer as many of those as we can.

    So, this is a CII accredited masterclass and the learning objectives are to be able to explain the money purchase death benefit changes in 2015, the lump sum and income options for pension death benefits and the key differences between money purchase and final salary death benefit. And that's where we'll begin. So, a key advantage of money purchase death benefit over DB is that the full fund is generally available. So, DB benefits are not being based on a fund value and inevitably involve a loss of the capitalised equivalent value of those benefits. So, under a defined benefit scheme, the member may be entitled to £100,000 annual pension. The spouse pension is often 50%. So that would involve a £50,000 spouses' pension being paid.  So there is then an immediate loss of the overall value of benefit at that point, under a DC scheme, and if there is perhaps £1 million in the fund and there is no lifetime allowance charged then generally that full fund is available to provide death benefits either with a lump sum or as a designation to draw down.

    In addition, money purchase death benefits are as flexible as the member benefits, with the added advantage that they are accessible before age 55.  So, the full fund may be available to provide beneficiary drawdown on a flexi-access basis so the beneficiary can access as much or as little of that as they like. There's no cap on the drawdown. Or the full fund is available to provide a lump sum death benefit. And the legislation is flexible enough as well to allow two different types of death benefits to be provided to different beneficiaries. What is actually available will depend on the scheme, but the flexibility is there in the legislation.

    In the context of DB transfer, so if considering a transfer from a defined benefit to a defined contribution scheme, then the death benefits are often given as the reason for that, but they are just one aspect of the overall scenario, and that needs to be weighed against all other relevant factors to determine if the transfer is suitable for that client, in those circumstances, and the FCA have reversed their position that the starting point should be that a transfer won't be suitable for the client and then has to be proved otherwise, and the improvement in death benefits may be one reason that is used as justification for that. But it can’t be used in isolation.

    Another advantage of DC death benefits over DB is the tax position. So again, this was improved from April 2015 onwards. So, it generally falls into two categories. At pre-75 the death benefits would be tax-free in the beneficiary's hands and in post-75 death, a marginal rate tax will apply and that could be as high as 45%. The trust then is 45%. The marginal rate could also mean no tax if the beneficiary perhaps has their full personal allowance available.

    Just looking at pre-75 deaths, they are tax-free, but only after the lifetime allowance charge or any lifetime allowance charge that applies has been deducted. So that still applies.  It's only once that has been dealt with, if it needs to be paid, that the death benefits are tax-free. One condition is that the death benefits have to be paid within two years of death. That could mean the lump sum being paid out or it could mean that designation to drawdown with no actual withdrawals being paid. It's just the designation has to be made within that two-year period.

    That the death benefits are tax-free also means that the 55% lifetime allowance charge can be avoided for the 25% lifetime allowance charge because there is then no further income tax after that to compensate for the lower tax value for lifetime allowance excesses. It does depend on drawdown being available. It does depend on a lifetime allowance excess being able to be being paid using one of the income options such as drawdown, but if that is the case, for funds over the lifetime allowance you'd opt for the 25% charge by taking an income rather than 55% charge by receiving a lump sum.

    So just to clarify that two-year period, that two-year period and the second bullet starts with the death of the member or the earliest date that the scheme could reasonably have been expected to learn of the member's death. So, from a practical point of view, there's likely to be a month or two between the member's actual date of death and the scheme becoming aware of it.  The two-year period starts when the scheme become aware of that, but it can be extended indefinitely, hence the use of the word reasonably in that caveat.

    Moving on to post-75 deaths.  They're taxed at the beneficiary's marginal rate.  There is no lifetime allowance charge for post-75 deaths, but that's only because it would have already be dealt with no later than age 75. So, either crystallisation before 75 or the age 75 lifetime allowance test from uncrystallised funds.  The two-year period on the left-hand side doesn't apply. However, there may be a separate period, separate two-year period for IHT purposes. So, in reality you're going to have to deal with the death benefits within that frame - that timeframe.

    So, just to contrast. For DB the option generally would be a dependent scheme pension and that is taxed at the recipient's marginal rate irrespective of the age at death. It doesn't matter whether it's pre or post=75, at the recipient's marginal rate of tax will apply to the dependent scheme pension.

    Just to remind what the old rule stated.  So, the old tax rules stated that lump sum death benefits from crystallised funds were taxed at 55 % and there was only lump sum death benefits from uncrystallised funds that were tax-free. So that essentially created a disincentive to crystallise. By moving from uncrystallised funds to crystallised funds if the death tax option is going to be a lump sum, then you essentially burden the beneficiary with a 55% tax charge and created a huge disincentive to crystallise. But now the death benefit from the tax is based just on the age and death. And that has gone, so there's no disadvantage in moving into drawdown for your beneficiaries.

    Moving on to nomination forms.  So, a further change in 2015 means that it's now more important than ever to keep your nomination of beneficiary form up to date. And that changes was tobeneficiary drawdown.  Beneficiary flexi-access drawdown is now essentially available to anyone. So pre-April 2015, only a dependent could receive drawdown. Hence it was referred to as dependent's drawdown. However, it's now available to any individual. There is a hoop to jump through and that is that if a beneficiary is a nondependent, then they have to actually be nominated either by the member or by the scheme. There is a further exception to that, which is if there are no dependents and no nominees, then beneficiary drawdown can be set up for anyone, but it's perhaps best not to rely on that and best to nominate any individual who the member does want to either benefit from drawdown or might want them to benefit from drawdown in the future. But they're just not sure at this moment.

    So, drawdown beneficiaries fall into three categories. So, either a dependent, a spouse or a child of the member under age 23, or it could be over age 23 in certain circumstances and then financial dependents and interdependent. So, a relatively narrow category. The second category of beneficiary is a nominee, and that could be any individual nominated by the member or by the scheme. And the final category is a successor, which is similar to a nominee. The key difference is that a successor is nominated by the current beneficiary, so they're the next beneficiary in the chain.

    OK, so yes, so a member has a personal pension during their lifetime. They make a nomination to their adult child, so a child aged over 23.  That individual is a nominee and they're classed as a dependent because of their age.  When the member dies, that nominee then has the option if they set up a beneficiary drawdown policy, then they then become entitled to those benefits. They are then entitled to make a nomination, perhaps to any individual, perhaps to the cohabitee.  When they then die, the individual they've nominated becomes entitled to benefit and they are a - a successor.  So, they would be entitled to a successor's drawdown, if that's what they opt for.  And then that is what essentially enables death benefits to be passed down through the generations. So, they always remain within a DC pension environment and are passed on through different types of beneficiaries. So perhaps starting with dependent on nominee and they could go on to a successor and then any number of successors after that are entitled to benefit.

    Ok, so moving on to the specific death benefit options.  Starting with lump sum death benefit. So, a lump sum can be paid from crystallised and uncrystallised funds. And there's no restriction on who a lump sum can be paid to.  You can pay any type of fund to any individual. There are various different types of lump sum death benefits. We tend to refer to them all as lump sum death benefits, but in reality, they include lots of different types of death benefit. So, it could be an uncrystallised fund lump sum death benefit. Annuity protection lump sum death benefit, and then we have two major types of drawdown fund, lump sum death benefits, which are broken down into flexi-access or just drawdown, which means capped drawdown. They may still exist, but then - but no new ones can be set up.

    So, the reason for separating them out as such is because the lifetime allowance test applies in different ways to each of those types of lump sum. So, the lifetime allowance test only applies to lump sums from uncrystallised funds. And only applies when the member dies before age 75 and it's paid within two years of death, as we mentioned on the earlier slide.

    The second, third and fourth on the list there - they've already been crystallised. So, there is no need to apply a lifetime allowance test.

    The income tax treatment applies in broadly the same way to all of those four there.  So, it depends on the age at death of the member.  Or it can depend on the age at death of the previous beneficiary, if you're talking about a successor receiving - sorry a further beneficiary receiving a lump sum.

    Ok, moving on to a beneficiary's annuity.  So before 6th April 2015, a beneficiary's annuity could also only be paid to a dependent as well.  So, similar to the change to drawdown, that was opened up to a wider variety of beneficiaries. So, it could also be paid to dependents, nominees and successors. However, there is a technical difference in that a beneficiary's annuity doesn't allow the funds to be passed on and passed down through the generations, and that is because beneficiaries annuity inevitably involve the funds moving out of the DC environment.

    Now, I'll just try and bring up all the graphics before I explain it.

    Yes, so there are - as I was saying that benefit annuity doesn't allow the funds to be passed down through the generations in the way that beneficiary drawdown does. So, for example, if a member who is entitled to a - or who is saving in a personal pension dies, are their beneficiary then opts for a dependent's annuity, then that involves the funds then being drawn away from the pension environment into the insurance based environment. So, what is then available when that annuitant then dies, depends on the terms and conditions of the annuity.  And so, there might be a guarantee period. But because the funds have been drawn away from the DC environment, then the death benefit options under DC, so the beneficiary's annuity for example, are no longer available. Also, therefore for a successor's annuity to be paid, then the funds have to be - have to remain within the DC environment. So perhaps a member dies. Their beneficiary then opts for dependents drawdowns.  They're a dependent beneficiary.  When they die, if there's a further beneficiary then decides to opt for an annuity, then that would be a successor's annuity. But the funds have to be within the DC environment for the fees to get to their successor's annuity option. Whereas if the first beneficiary opted for an annuity, then that option falls away.

    Okay, I'm now going to hand over to Bernadette, who's going to go through the drawdown death benefit option.

    Bernadette Lewis: Thank you, Tom.

    Bernadette Lewis: So, if we're looking at beneficiary flexi-access drawdown, all new arrangements setup since April 2015, are beneficiary flexi-access drawdown.  People who had set up capped dependents drawdown before April 2015 can continue in those arrangements, but they have no disadvantage if they want to swap over to flexi-access drawdown for the beneficiary or dependents. That does not trigger the money purchase annual allowance, unlike the position if you've got a member in capped drawdown moving to flexi-access drawdown.

    So, from 2015 you've also got the wide option of using flexi-access drawdown for any form of beneficiary who can be a dependent, a nominee or a successor of the member. And in all cases, the income tax treatment of withdrawals from beneficiary flexi-access drawdown depends entirely on the age actually at death of the original member, or if we're moving into successor beneficiary flexi-access drawdown, you then look at the age at death of the previous beneficiary.

    So, if we start off with a member who dies under the age of 75.  So, it's their age at death which matters for this purpose.  We set up flexi-access drawdown for their dependents.  So, that individual will receive their income from that flexi-access drawdown plan entirely tax-free, once you've been through the LTA test. If the original beneficiary, the dependent, then dies at age 77, there may still be some funds left over in the beneficiary flexi-access drawdown plan. They can be paid out to a successor nominated by that original beneficiary. And that successor can be a dependent or somebody else who's been nominated by the previous beneficiary. But that recipient of the funds will now be paying their own marginal rate of income tax when they draw money out of that beneficiary flexi-access drawdown pot.

    So, this option of using successors’ beneficiary flexi-access drawdown links to money purchase/ personal pensions for inheritance tax planning. So, we are talking here about those who are at the wealthier end of the scale who don't actually need their personal pensions to provide them with retirement income. But it's a very valuable option for anybody who is in that position.

    So, to start with, people who are not in serious ill health at the point that they make a pension contribution do not make a transfer of value for inheritance tax purposes, which is a significant difference between most of other kinds of gifting that somebody can make in their life for inheritance tax. And for the vast majority of people, they can then build up a pot of money to provide death benefits, which will be out of the estate of the actual pension scheme member. And that pot of money will be also outside of the arrangements where you have to pay inheritance tax periodic and exit charges. So again, that's an advantage compared with building up money in an ordinary discretionary trust.

    The vast majority of pension schemes allow the scheme administrators or trustees to exercise their discretion and the reason for this is that giving the scheme trustees or administrators discretion over who gets the death benefit makes that into a scheme where the death benefits do not fall into the member's inheritance tax estate. Now there are some older arrangements, particularly if you go back to section 226 pensions, originally sold to self-employed people, and also some section 32 plans for accepting transfers out of occupational schemes, that have rules where the pension scheme fund is paid into the estate unless the member sets up an individual trust over their death benefits in their lifetime. And currently we also have the position where the default with NEST is that they will pay the money into the estate unless the member opts to have discretionary powers applied to their pension pot. But generally, most pension schemes operate discretion because it's inheritance tax efficient.

    So, as well as the member having an inheritance tax-efficient death benefits pot, beneficiary flexi-access drawdown allows the original beneficiary to have funds in a pension fund and outside their inheritance tax estate. And then if there are funds left over when that original beneficiary dies, they can pass them on to a successor, who could be their own child or grandchild. And there is no limit to the number of times that remaining funds can be passed on to another successor. Always keeping the funds out of anybody's inheritance tax estate.

    So, if we start off with a member with their own personal pension ringfenced outside their estate, their choice on death might be to set up beneficiary flexi-access drawdown for a dependent, in which case those funds will be outside of that recipient's inheritance tax estate. If the funds are used instead to pay a lump sum, those funds fall into that recipient's inheritance tax estate. So, if you opted for flexi-access drawdown for the dependent, when they die, you've got another chance to keep the funds outside of anybody's inheritance tax estate, by setting up successor flexi-access drawdown for their nominee. However, if that wasn't appropriate, you could still pay out a lump sum. But again, that would end up in a recipient's inheritance tax estate. So, as I say, you can do this any number of times.  So long as the money was in beneficiary flexi-access drawdown, when the beneficiary of that particular fund dies, they can continue to leave it in beneficiary flexi-access drawdown for their successor. If that isn't appropriate, then the alternative could be paying out a lump sum. But that does bring the money into somebody's inheritance tax estate.

    We do get asked about bypass trusts and it is still possible to leave a lump sum death benefit into a bypass trust. So, it is still an option. To do this, the member themselves needs to set up a bypass trust in their lifetime. So, because it sets up by the member in lifetime, it's sometimes called a pilot trust.  In order to create a valid trust, you have to have some trust property in there. So normally that would be done with a nominal amount such as £10 or £20 because until the person dies, their death benefits are kept in their pension scheme. And you create the link between the bypass trust and the pension scheme death benefits via a bog standard nomination of beneficiary form. And you would complete that by naming the trustees. So, say, X and Y as trustees of my bypass trust set up on such and such a date. So, in that way, the pension scheme knows that they're paying this money to these people in their capacity as trustees. But again, the pension scheme will be exercising their discretion to make that decision.

    So, if the pension scheme trustees do decide that the most appropriate thing to do, is to follow the nomination of beneficiary, they will pay out the death benefits as a lump sum into the bypass trust. So, the lump sum will be tax-free if the member died under age 75. If the member was 75 or older on their date of death, then the lump sum death benefits will be paid out with a deduction of 45%. The 45% tax rate always applies when money is paid into any form of discretionary trust, and most bypass trusts will be set up as discretionary trusts. Certainly, anything off the shelf from a provider is on that basis. Once the money is in that bypass trust, it is an ordinary discretionary trust subject to ordinary inheritance tax rules. So periodic charges will apply every 10 years. Exit charges will apply if capital is paid out of the trust. And you could also have - depending on how you invest the money, trust income tax and trust capital gains tax, having to be reported on a trustee self-assessment tax return. So certainly, the taxation can get complicated and I haven't even mentioned the complications of establishing when the trust initially started because that's a whole other issue, but as I mentioned, it does get complicated.

    So given the fact that if the member does die over 75, you're going to have this 45% tax deduction before it's paid into the trust, there is an income tax credit is given if income is paid out of the trust to a beneficiary later on and that income tax credit is at 45%. But that does assume that it balances off if you're going to pay that money straight out of the trust to your beneficiary. But if your intention is to keep these funds invested so the trustees can exercise discretion over a longer period of time, you've only got 55% of the death benefit available to invest, and I think you can see that that's going to be a significant drag on performance compared with setting up beneficiary flexi-access drawdown, where the entire pension fund can sit in a beneficiary flexi-access drawdown pension fund, subject to pension taxation.

    So, for those reasons, we generally think that for most people, beneficiary flex access drawdown is going to be the most suitable option compared to a bypass trust. Beneficiary flexi-access drawdown is inheritance tax-efficient, can be passed down through the generations and it's very simple to set up and administer.

    We do get people who particularly want to bypass trust because they've got family circumstances where they want control. They have to be aware that even if they do set up a bypass trust, getting the money into the bypass trust in the first place depends on the pension scheme trustees or administrators using their discretionary powers to actually accept that nomination. And also when the member is dead, they will have to rely on their own trustees to use their own discretionary powers to pay to specific beneficiaries. So some people, if you've got very specific requirements, will have to choose their trustees with great care and might actually want a bespoke bypass trust that limits the range of possible beneficiaries. And again, those are things that we don't offer as a provider, but these options are out there.

    So lifetime allowance and death benefits. So there are three occasions on which pension scheme death benefits for somebody who dies under 75 can be tested against the lifetime allowance. So these three benefit crystallisation events are 5C and 5D, which apply to the two income possibilities. So, 5C applies if the member dies under age 75 and the funds are used for flexi-access drawdown or beneficiary flexi-access drawdown. 5D applies if the funds are used to purchase an annuity and BCE7 is used when the funds are used to provide a lump sum death benefit. And in all cases, these tests apply to funds which are uncrystallised and the member dies before age 75. The BCE test applies provided that designation to flexi-access drawdown purchase of an annuity or payment of a death benefit is made within two years of that date of death or reasonable notification to the scheme of the date of death. If you wait more than two years after the member's death, you avoid the benefit crystallisation test. However, you also lose the opportunity for funds up to the remaining available lifetime allowance to be paid out tax-free. And the entirety of the death benefit will be subject to income tax in the recipient's hands at their own income tax rate.

    So all three of these benefit crystallisation type events are deemed to have occurred on the date of death, so they will apply if the member died under 75 even if there's a time before the funds are actually paid out. But when you actually come to do the calculation of the amount of death benefits that are tested, it's actually the amounts on the dates they are paid out.  So you could have to wait until the last of a series of benefits is paid out to work out your overall benefit crystallisation events, and because of that, they are all treated as having occurred simultaneously on the date of death. And if there is an excess over the member's available lifetime allowance on the date of death, then each benefit crystallisation test event, if there is more than one, bears its own share of any LTA charge. It's the deceased member's personal representatives who have to calculate whether there is a lifetime allowance charge and the various elements, but the recipient beneficiary is the person who is actually liable to pay the charge. So obviously they've got their death benefits funds out of which they can pay the charge and they pay via their own self-assessment tax return.

    If the member dies on their 75th birthday or older, none of these benefit crystallisation tests applies because they would have either previously crystallised or they would have been through the age 75 lifetime allowance tests and so for lifetime allowance purposes, you also don't have to worry about making payment within two years. So as Tom mentioned earlier, there can be inheritance tax reasons why you would still want to do that.

    But if we compare the treatments of lifetime benefit crystallisation events with death benefit crystallisation events, for lifetime purposes, you treat each benefit crystallisation event in chronological order. So it's possible, if someone has a series of benefit crystallisation events, that maybe the first two would be within their remaining lifetime allowance. And it's the third one which exceeds their lifetime allowance and triggers a lifetime allowance charge. So it's only that third benefit crystallisation event that bears a lifetime allowance tax charge. With death benefit lifetime allowance tests, if there are different payments to different people or payments from different funds, they're all treated as occurring at the same time. So the excess amount gets apportioned out between the various recipients, between the various different types of death benefits and each one of those bears its own share of the overall lifetime allowance charge.

    Sometimes the calculations can get a bit complicated. For example, if somebody ends up having death benefits paid out to two different beneficiaries, and different types of death benefits are paid out. So, if we have a client who's got £100,0000 of lifetime allowance left and their pension schemes pay out a £50,000 lump sum to their son and £150,0000 flexi-access drawdown to the daughter. That’s £200,000 of total death benefits and £100,0000 excess over their lifetime allowance. So the son is going to be paying 55% tax on his share of the excess. So the overall excess is £100,000. He pays 55% tax but he pays that on a quarter of the overall death benefits and his tax charge is £13,750.  The daughter pays her lifetime allowance charge at 25% on beneficiary flexi-access drawdown. So again, it's 25% of the £100,000 excess. But she pays that on three-quarters of the excess, her share of the overall death benefits, and her tax charge is £18,750.  And this also stresses the point that if you have a choice from the scheme, and the member dies under age 75, you're definitely going to be better off opting for beneficiary flexi-access drawdown, whereas the recipient pays a 25%  charge and can then draw on the funds immediately and effectively get a lump sum out of that arrangement without having to pay any further income tax, whereas a pure lump sum payment will bear 55% tax upfront.

    So, we did mention earlier on that one of the reasons why people are interested in pension scheme death benefits is the inheritance tax position and the uncertain position we are still in following the Staveley case. This actually dates back all the way to 2006. Under pre-2006 pension scheme rules, Mrs. Staveley was in a position where, having had a bitter divorce from her husband, her pension scheme death benefits from an executive pension plan linked to their former company had been transferred into a section 32. But if she died, there was a possibility that there were some excess benefits under the old rules, which would have been returned to the employer and therefore indirectly benefited her ex-husband. And she really did not want this to happen. So, she then transferred from this section 32 plan to a personal pension plan, which meant that this could not possibly happen, she fully severed any link. However, she was in very severe ill health at the time that she made the transfer and she died very shortly afterwards. So, HMRC argued, as it still does, that in making that transfer she had taken control of the pension scheme death benefits. The Staveley family objected to that. And the case has now gone to the first tier tribunal where the family have won, upper-tier tribunal, where the family won, and the appeal court, which found in favour of HMRC. And given the significance of the case, it's currently listed at the Supreme Court with a hearing planned for next year.

    So the current view remains at HMRC that there is a transfer of value for inheritance tax purposes. The underlying rules relate to associated operations. But unfortunately we've had not only two to three different rulings from three different tax tribunals, but the appeal court judges didn't even agree on what basis they found in favour of HMRC. So we can't give you a clear idea of why this applies. Just be aware that it does. So we would, therefore, say that you really do have to be careful and warn clients that there could be an inheritance tax charge if they are making a transfer, particularly to improve their death benefits, because they are in ill health.  At the moment. HMRC doesn't publish how it calculates the inheritance tax charge although we're aware some experts will give people help in arguing ways to reduce the possible tax charge. And it's unlikely we will get anything definitive from HMRC themselves until after the appeal is heard by the Supreme Court and we have a final ruling. It's possible that if the case goes in HMRC's favour, that there will be significant lobbying to change the underlying legislation. And certainly at least one firm is already calling for pensions simply to be made exempt from inheritance tax to avoid people falling into this trap of making a transfer and then dying.  Whereas if they'd stayed in their previous scheme, their benefits would still be inheritance tax-free.

    Thomas Coughlan: Okay.  I think we'll have to skip the resource section and go straight to the Q and A.

    Bernadette Lewis: Yes.  I was just going to say that Tech Talk will be out very, very shortly including an article which relates to today's session.

    Thomas Coughlan: Ok, great. Thank you, Bernadette. OK, we'll just try and deal with some of the questions that you've submitted before handing back  for closing comments. OK, I have a question. If death occurred, say at 73 and a half and benefits not paid out within two years is the LTA charge subsequently avoided? So yes.  So, for a pre-75 death, if you go beyond that two-year period then the lifetime allowance charge doesn't apply. It's got nothing to do with the member then - who would have been then 75.  It's just that you're outside of that two-year period so the death benefits are no longer tax-free and the lifetime allowance charge doesn't apply. So that is just the way the rules are.

    Okay.  A question for Bernadette.  If a bypass trust exists, is it possible for this to be overridden at death if a more suitable route is identified?  I.e.the trustees exercise their discretion not to pay o the trust?

    Bernadette Lewis: Yes. The bypass trust is separate from your pension scheme death benefits. It simply sits there waiting to receive them if the pension scheme trustees agree that that's the most appropriate course of action. So pension scheme trustees should always be consulting with the member's legal personal representatives to identify possible beneficiaries and exercising their discretion.

    Tom Coughlan: Okay.  Great and another similar one on the same topic, bypass trusts.  How much of a tax credit is given on payments out of the trusts?  So, presumably when the 45% tax charge has been paid upfront on the lump sum paid into the bypass trust.

    Bernadette Lewis: Yes.  It's a 45% credit and because it is treated as an income tax charge, that's then set against income distributed from the trust, as far as I can work out from HMRC pension tax manual.  It's one of those bits where you you're trying to work out what they mean. So I think you would - if you had a real-life case, you would have to check with an accountant as to how they interpret the legislation.

    Tom Coughlan: Okay great. Another question.  I think I'll deal with this one. With uncrystallised funds on death after 75. Is any of the lump sum payment tax-free to reflect the loss of the tax-free cash? Unfortunately not. The tax-free cash is something that is only available to the member and none of that is available after death to the beneficiary.  So, the tax-free cash is lost at the point of death.

    Okay, is there anything else we can look at?  Okay, if a member died post 75 and leaves to a spouse who then dies under 75, is the subsequent successor drawdown free of tax?  So yes - so for the death benefit to be tax-free you just look at the age at death of the most recently deceased individual.  So, if the member dies under age 75 it's tax-free.  However, if the member dies over 75 then the first beneficiary doesn't get those death benefits tax-free. But if they then die under age 75, then the subsequent beneficiary does get their death benefits tax-free. So, you're just looking at the age at death of the member or the last beneficiary.

    We've got quite a few questions coming in. And we haven't got time to deal with more. So any questions that we haven't resolved we'll e-mail you directly. So now I will hand back to Paul for closing comments.

    Paul Rutkowski: Great. Thanks very much, Tom, and thanks very much, Bernadette. Death benefits are clearly a complex topic, and it's important to be aware of the rules so that clients can benefit from the favourable tax treatment available to them, helping to maximise how much of their savings can be passed on. Hopefully this presentation has helped to consolidate your knowledge and remind you of some of the key aspects that you may need to consider.  If you'd like further information on any of the topics covered in the first instance please speak to your Scottish Widows contact, or you can visit the Scottish Widows Adviser Extranet web site to access our technical resources. As with our previous masterclasses, a recording will be placed on the Extranet for further review and CPD certificates will also be issued following today's presentation for those that have attended live.

    My thanks once again to Bernadette and Tom for taking us through the slides. Thank you all for joining. And thank you for the many questions that you've raised. As Tom said, for those we didn't get to today, we will issue an answer directly to you. And that concludes today's presentation. Thank you very much.

    Operator: Thank you for your participation, you may now disconnect.

Get more expertise

Knowledge Centre

Search our expertise on any subject.

See Knowledge Centre

TechTalk

Look at our latest analysis market developments and opportunities.

See TechTalk

FundsTalk

Look at our latest analysison investments and funds.

See FundsTalk