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What happens with my pension fund if I die?

We are now a few months into the new legislation permitting freedom and flexibility within pension funds. In this instance we are looking particularly at the death benefits and what discretion scheme administrators hold. The additional flexibility in how death benefits can be paid puts an emphasis on members getting their completed expression of wish form into their providers and this being as up to date as possible.

What discretion does the scheme administrator hold in allocating death benefits?

When it comes to lump sum payments on death, scheme administrators still have full discretion over how monies are to be paid. Whether an administrator will want to change a member’s nomination or not will depend on the particular circumstances and their own procedures.

Case study scenario

Mrs P Saver dies at the age of 78 with a SIPP fund of £500,000.

The trustees hold an expression of wish form which stipulates that Mrs Saver wanted to leave the assets to her husband Mr Saver. They have 2 children who are both over 40 and 5 grandchildren.

Mr Saver does not want the SIPP money since he is a 40% tax payer with an inheritance tax liability that is already causing him concerns. Due diligence was conducted by the trustees and written confirmation from Mr Saver was received, as the dependant, that he didn’t want the money and was happy for his share of the SIPP fund to be distributed to the other members of the family.

In this case the two grown up children also provided written confirmation that they didn’t wish to benefit from this SIPP fund so the assets were divided equally between the 5 grandchildren.

As the funds are sizeable the grandchildren pay 40% income tax on the lump sum withdrawal. As most of them are at university had the expression of wish form mentioned them it would have been possible to pass the funds under flexi access. The grandchildren are then likely to have paid less tax, withdrawing the funds gradually instead as one lump sum.

Therefore when it comes to paying funds under flexi access what discretion the scheme administrator has will depend on what information they already have. It is useful to know who can be considered a dependant under HMRC rules first:

A person who was married to, or a civil partner of, the member at the date of the member’s death is a dependant of the member.

 A child of the member is a dependant of the member if the child

has not reached the age of 23, or

has reached the age of 23, and in the opinion of the scheme administrator, was at the date of the member’s death dependent on the member because of physical or mental impairment.

A person who was not married to the member or was not in a civil partnership with the member at the date of the member’s death and is not a child of the member is a dependant of the member if, in the opinion of the scheme administrator, at the date of the member’s death the person was financially dependant on the member, the person’s financial relationship with the member was one of mutual dependence, or the person was dependant on the member because of physical or mental impairment.

We will look now at various question and answer scenarios dependent on the expression of wish forms held;

Q What does the expression of wish state?  A Named dependants only

The scheme administrator has the potential to pay to those named dependants or indeed to pay to any other dependants that meet the criteria (as detailed above).

What are the consequences if for example we look again at Mr & Mrs Saver?

It is unlikely that in this scenario there would be any unnamed dependants. We can see the tax consequences of not being able to utilise flexi access in this instance for the grandchildren. The options are for either Mr Saver to receive it as a lump sum or receive it under flexi access. Either way he will pay at least 40% income tax on withdrawals.

The alternative is for the grandchildren to receive the funds as a lump sum on which higher rate tax will be due. If Mrs Saver had named her 5 grandchildren as nominees this payment of income tax could have been avoided or reduced as the grandchildren could have received the funds under flexi access, paying only income tax on what is withdrawn on each occasion.

Q What does the expression of wish state?  A Dependant and other nominees

The scheme administrator has the potential to pay benefits to named dependants, other dependants, and named nominees.

What are the consequences of this?

Looking again at Mrs Saver lets say her nomination form names her husband and at the time she completed it she only had 4 grandchildren who were also named. The trustees could bypass Mr Saver and the children and with all the correct permissions could give flexi access to the named grandchildren. The 5th grandchild however, would only be able to receive a lump sum benefit with the associated income tax charge.

Q What does the expression of wish state?  A Nominees only

The scheme administrator has the potential to pay to any dependants or named nominees

What are the consequences of this?

The situation and scenarios would be the same as the case immediately above where nominees and dependants are named. But we must stress again that it is named nominees that can receive the benefits under flexi access, therefore expression of wishes must be kept up to date.

Q What does the expression of wish state?  A There is no expression of wish

What are the consequences of this?

The scheme administrator is a little restricted in so much as flexi access benefits can only be issued to dependants. Only if there are no dependants can the trustees look to the wider family.

So in the case of Mr and Mrs Saver the trustees would be in the same scenario as if Mr Saver had been nominated in so much that it would only be possible to pay him flexi access benefits and the wider family lump sum benefits only.

We appreciate that this is a complex area and requires careful financial planning and we hope by giving you some of these examples you are able to give further consideration to your own or your client’s circumstances.

For further information on the payment of death benefits, please speak with Kerry Houghton on 01772 550614 or via email kerry.houghton@taypat.co.uk.

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