The change in the pension death benefit rules from 6 April 2015 has seemed to spark an increased interest from pension scheme members looking at what will happen to their pension benefits on death and trying to ensure their wishes are adhered to.
It would seem that members are trying to cover off all eventualities in one go, in the most tax efficient manner and that their wishes are passed down through the generations. However, in reality this might not be possible and the likelihood is that a trade-off between tax efficiency and control might have to be made.
The following looks at the options available to members when looking to nominate pension death benefits, but please be aware that this relates to AXA Wealth’s pension contracts and other providers might be slightly different.
The potential options for pension death benefit nominations are:
- Integrated trust (By-pass trust)
- Pilot trust (By-pass trust)
- Expression of wish
Under the previous death benefit regime the Integrated Trust was an attractive option as it automatically carved out the lump sum death benefits into the trust and there was no scheme administrator discretion.
Under the new death benefit rules whilst payment of death benefits into a trust where death occurred under the age of 75 is tax free, the assets will become trust assets and as such be in a taxable environment. Death from age 75 would mean a tax charge of 45% on the benefits before they are paid into the trust. As a result, from a tax efficiency point of view a by-pass trust does not look the most attractive option.
AXA Wealth have in fact withdrawn the integrated trust for new business, but there are still existing ones the many clients have and these existing integrated trust cannot be revoked.
This could lead to adverse tax consequences that the member may wish to avoid, so what can be done?
If the member decides that they no longer want their pension death benefits to be paid to the integrated trust, they have two options;
- Set up an allocation
- Set up an expression of wish
The Expression of wish option needs to express that benefits should be paid as income to the beneficiary, otherwise AXA will pay benefit as a lump sum to the integrated trust.
Prior to 6 April 2015 pension death benefits could have been paid via an “Allocation” to a dependent, but since this date an allocation can only be made in favour of a spouse or civil partner.