Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Will pension death benefits survive Covid?
Do you expect the Government to continue to allow such generous pension death benefits given the financial challenges posed by coronavirus?
Tom Selby, AJ Bell Senior Analyst says:
It’s probably worth explaining how pension death benefits work before getting into any possible future changes.
Two sets of reforms were introduced in April 2015 designed to make pensions more attractive. The first and likely most well-known reform were the ‘pension freedoms’, allowing anyone aged 55 or over to access their defined contribution pot as and when they want.
This marked a changing of the guard for retirement income options, opening a world of choice and flexibility up to ordinary savers.
Since 2015 around three people enter drawdown for every annuity bought, whereas before securing a guaranteed income from an insurance company was the most common option.
The second less-heralded change was to how defined contribution pensions could be passed on to loved ones on death.
It is now possible to pass any undrawn funds tax-free to your nominated beneficiaries if you die before age 75.
If you die after age 75, any funds passed down to your beneficiaries will be taxed at their marginal rate when they come to make a withdrawal.
If your beneficiary then dies before age 75, that money can be passed on to their beneficiaries tax-free too. This reform at a stroke made pensions not just a tax-efficient inheritance vehicle, but one which can potentially be used to pass wealth down the generations. In many cases, it now makes sense for your pension to be among the last financial assets you spend in retirement.
There are a couple of important things to remember here. If you die before age 75 then funds must be paid to your beneficiaries within two years to be tax-free. If they are not then they will be taxed at your recipients’ marginal rate of income tax.
If your fund or part of your fund hasn’t been tested against the lifetime allowance before you died, a test will be carried out before any funds are passed on. However, any inherited pension funds will not count towards the lifetime allowance of your beneficiaries.
You should also make sure your nominated beneficiaries are kept up-to-date so your pension provider knows who you would like to receive your pension when you die.
WILL THE GOVERNMENT MAKE CHANGES TO DEATH BENEFITS?
There are no guarantees about policy in this area – or any other area for that matter. We have already seen the chancellor announce a freeze to the lifetime allowance for the rest of this parliament, although encouragingly the treasury has played down the prospect of radical pension tax relief reform.
Given the level of uncertainty that exists around all tax-incentivised savings products, the best anyone can really do is save based on the rules as they see them today and adjust plans as and when any changes are announced.
Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.