PENSION FUNDS CAN BE VERY EFFECTIVE IN ESTATE PLANNING
As well as the increased accessibility in terms of withdrawing from pensions, there were also some important changes to what happens to the money that hasn’t been withdrawn upon death.
These changes mean that your pension fund can be passed to your loved ones tax efficiently.
What if the pension scheme member is under 75?
If the pension scheme member dies under age 75, certain lump sum death benefits are now tax-free. Especially a drawdown or flexi-drawdown pension fund lump sum death benefit, or an uncrystallised funds lump sum (UFPLS) death benefit.
What does an UFPLS allow a pension holder to withdraw?
Uncrystallised fund pension lump sum allows pension holders to withdraw some or all of their uncrystallised funds as a lump sum. Within the limitations of the Lifetime Allowance, 25% of the UFPLS will be paid tax free, with the balance taxed as pension income at the point of withdrawal.
What if the pension scheme member is over 75?
Where the member at the time of their death was age 75 or older, the special lump sum death benefit charge on the fund will be 45%.
However, if a nominated beneficiary wants to draw down income each year rather than take the lump sum, the amounts drawn would be taxed at their marginal income tax rate.
So what does this mean for me?
It has recently been reported that there are currently £2 billion of pension assets in drawdown where the beneficiary is aged under 55, suggesting that a significant number of individuals have taken advantage of the new rules.
Cash and quoted shares, including those held within an ISA, are subject to inheritance tax on death whereas pension fund assets are generally free from inheritance tax.
It may therefore be more tax efficient to spend or give away cash and shares rather than draw on the pension fund.
Please come and talk to us if you would like to discuss estate and inheritance tax planning in more detail.