There’s an old joke that you wait ages for a bus and then three come along at once. This summer Will planning experienced its own version.
For much of 2014 estate planning was preoccupied with proposed changes to trusts that were cancelled at the last minute, so nothing major seems to have occurred for ages. But over the summer there were three events that mean large numbers of people may need to review their existing wills.
These three each merit a post of their own so over the next few days, I’ll be explaining each one in more detail and illustrating how you may need to change your arrangements as a result.
The first is the final confirmation of the death benefit rules under Pensions Freedoms. These are a major game-changer.
Prior to Pensions Freedoms, pension benefits on death were paid out tax-free only if no benefits had been taken and if death occurred prior to age 75. Once tax-free cash had been accessed and the balance of the fund placed in drawdown, any lump sum on death was taxed at 55%.
This has completely changed. The major changes are that funds paid out on death before age 75 are paid tax-free regardless of whether any benefits have been taken. After 75 those funds are taxed at the recipient’s marginal rate of tax, which could be 0%, 20%, or 40%. This is important as another change introduced was to extend the potential beneficiaries that could be a recipient of a lump sum from a pension scheme on death
The main effect of these changes is to make pension funds a potentially very powerful and flexible estate planning vehicle in addition to their role as a provider of income in retirement.
Firstly, in many instances, it might be more tax-efficient and sensible to utilise non-pension assets to provide retirement income and leave pension funds intact. This is because pension income is taxable in the hands of the recipient (potentially up to 40 or 45%), but the fund might pass to beneficiaries tax-free. Funds outside a pension might be able to provide “income” at no or lower rates of tax, but might only pass to a beneficiary less inheritance tax at 40% - the complete opposite!
Secondly it’s now possible to bypass generations with your pension fund on death and pass it to grandchildren for example, rather than the default option of leaving your fund to a spouse. This offers the possibility of leaving a bequest to pay for grandchildren’s school fees via your pension fund rather than setting-up a Trust in your will, which might achieve the same end result but in a much simpler way and at lower cost.
So, if you decide to take full advantage of the new Pension Freedoms by using up non-pension assets before your pension fund, and you have the option to leave your pension fund(s) to a wider range of potential beneficiaries, it seems clear to me that you may need to review who benefits from what in your will to ensure your objectives for family inheritance are still being met. You also need to consult with your Financial Planner to ensure that firstly, the pension provider can accommodate these new flexible options on death (not all can and not for all contracts), and secondly to ensure that the new death benefit nomination form is completed in the right manner to ensure these options are not excluded.
In part two of this series I’ll be covering the Family Home Allowance.
None of the above constitutes specific legal advice and as ever, you should ensure that any estate planner you consult is appropriately qualified and has relevant expertise in the area concerned. As Chartered Financial Planners we have access to such qualified legal experts, so please contact LIFT if you would like a referral.