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Pensions: How to cope with death benefit changes

by Mike Morrison on Nov 04, 2011 at 10:32

Pensions: How to cope with death benefit changes

The negative effects of recent changes in the rules for drawdown pension death benefit payments can be mitigated, as fictional IFA David Peckham tells his client, writes AXA Wealth's Mike Morrison.

David Peckham has just returned from holiday and, as he sits in the boardroom waiting for his client, his two weeks of sun, sea and sangria seem but a distant memory. His meeting with Bryan Riggs is to explain the changes in the rules for drawdown pension death benefit payments.

The two men grew up together and it seemed logical that David would become Bryan’s adviser. The meeting has been arranged since late April, but Bryan has been somewhat elusive and circumstances have made it difficult for them to get together until now. David reads the briefing note his paraplanner has prepared for the meeting.

Bryan is 56 and has a large Sipp fund from which he has drawn the pension commencement lump sum (PCLS) at 55 but then drawn no income. David had not known why the need for the cash had arisen so quickly, but one thing he has learned over the years is that Bryan has many dealings that he keeps very close to his chest.

Death benefit changes

David plans to tell Bryan about the changes in the rules for drawdown pension death benefit payments after 6 April. He reads through the note of the meeting when Bryan had taken the lump sum.

He had explained to him then that one of the consequences of drawing the money would be a tax charge of 35% on Bryan’s death if the fund was used to provide a lump sum. Bryan had accepted that and, indeed, they had set up a spousal bypass trust so the residual fund could potentially be paid to Bryan’s two children from his first marriage. Bryan has provided a letter of wishes to the trustees of the bypass trust to explain this.

As part of the review process David has initiated for existing clients, he needs to explain the revised rules to Bryan and break the news that the potential lump-sum death benefit tax charge has increased to 55%.

Bryan arrives and David’s first comment, after shaking hands, is to suggest that he looks a bit tired. Bryan smiles: ‘Too many late nights!’

Getting down to business, David explains the change in the rules and how, in essence, drawdown has become more flexible. However, he continues, two of the changes that have provoked industry comment have been the worsening of the Government Actuary Department rates that govern how much Bryan is able to draw from his crystallised drawdown pension fund, and the increase in the lump-sum death benefit tax charge.

Tax mitigation

Bryan listens carefully, then asks whether there are any situations in which he can avoid the tax charge. David’s file includes a reminder that Bryan has remarried.

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2 comments so far. Why not have your say?


Nov 07, 2011 at 19:11

We need to be wary of the supposed ability to make lump sum payments to charity from a drawdown arrangement, free of the 55% charge. I recently discussed the option of leaving a lump sum death benefit to charity with a client of mine who was single with no dependants. He already had an existing drawdown policy set up in 2008, and we were adding another tranche to it. I contacted the provider with a querey regarding the completion of the "nomination" section of the application, following which it was made clear to me that the client could not make a payment to charity from the drawdown pension without the 55% tax charge applying, simply because the scheme rules did not allow it. Basically, although legislation allows for tax free payments to charity, if the scheme rules don't allow it you may not be able to do it.

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Thornton Wells

Nov 09, 2011 at 12:38

That's a very easily pleased client! Not sure why the SB trust was required, assuming the children are adult children and could therefore simply receive the benefits directly from the pension scheme?

JNP's point is a very good one that obviously also applies to other types of benefits, investments etc - just because legislation allows it, doesn't mean all schemes/providers do.

There is another planning avenue to consider for this type of client - and no I don't mean anything agressive of offshore!

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