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Pension Reforms - Death benefits

Sweeping pension reforms announced by the Chancellor in the 2014 Budget came into effect in April this year.

The liberalisation of how benefits can be taken from many UK pensions - with no limit on how much can be drawn from the pension fund (subject to income tax*) - has been widely reported and covered in previous editions of Wise Words.

Another significant aspect of this reform is the way death benefits have changed for many UK pensions. The details emerged at the end of 2014 and have received less widespread publicity. The new rules are summarised below:

  • On death of the pension policyholder before age 75, the full value of a pension fund can be passed to a nominated beneficiary or beneficiaries free of all tax. The beneficiaries do not have to be dependants and could be a spouse, partner, child or grandchild or, in fact, anyone.
  • On death of the pension policyholder after age 75, the pension fund remains a pension fund but is now available to the beneficiary or beneficiaries nominated by the deceased pensioner. The beneficiary can then draw on all or part of the fund as he or she wishes, if they are 18 or older. Such withdrawals are subject to income tax in the year the withdrawals are made. There is no tax whatsoever on the fund passing from the deceased policyholder to the beneficiary, who becomes the new policyholder and can draw on the pension fund in much the same way as the deceased policyholder.

These new rules are simpler and in virtually all circumstances, more tax-efficient than the old rules.

What action do you need to consider?

The pension policyholder should review the nomination of beneficiary or beneficiaries under their pensions in light of the new flexibility available. Remember most pensions are trust arrangements and the beneficiaries on death are not determined by the provisions of the policyholder's will.

Take advice

These reforms do not affect all types of pension in the way described above. Take professional advice and remember not all pensions are the same and will need to be looked at individually and in the context of the individual's personal and financial circumstances.

Wise Financial Solutions offer a free initial meeting and this can be arranged either through your usual Wise & Co contact or directly with our Wise Financial Solutions consultants:

For further information please contact Martyn Lodge at Wise Financial Solutions on 01252 711244.

Note: * Assumes that any tax free cash lump sum has already been taken. Early call for employers on automatic enrolment.

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