Overview
A pension makes cascading residual wealth to loved ones and future generations possible, and can be very tax efficient. Making nominations is important to ensure your client’s wishes to leave a legacy are clear. Without a nomination, the benefit options on death are more limited.
Since 2015, the way death benefits are taxed means:
- defined contribution pensions could be the last to be accessed
- an opportunity has been opened up for generational wealth planning
- potential beneficiaries should be involved in the intended planning
- financial planning opportunities have been created for future savings patterns.
The Collective Retirement Account (CRA) is a pension arrangement where your clients can take full advantage of the death benefit flexibilities on offer. Beneficiary drawdown might not be available via all defined contribution pension schemes so you will need to check your client’s current arrangements.
Who can receive benefits on a member’s death?
The scheme administrator cannot use their discretion to give flexi-access to anyone else if there is a nomination on file or a dependant exists.
Lump sums
- A dependant
- Any other beneficiary nominated by the member
- Any other beneficiary chosen at the discretion of the scheme administrator
Beneficiary drawdown
- A dependant
- Anyone nominated by the member on their expression of wish
Beneficiaries’ drawdown
- Beneficiaries/nominees don’t need to be financial dependants for the future.
- Can be passed on in perpetuity.
- Beneficiaries flexi-access drawdown – tax treatment depends on date of death of the member.
- Not part of beneficiaries’/nominees’ own Lifetime Allowance.
- Leaves funds in pension arena for use as and when needed.
- Opens up intergenerational planning from potential funds available.
Beneficiary drawdown within the CRA has no age restrictions, meaning beneficiaries under the age of 18 are able to access this facility.
Death benefit taxation
|
Uncrystallised or crystallised |
Death before age 75 | Death after age 75 |
|
Lump sum death benefit |
Tax-free* | Tax at beneficiaries’ marginal rate of tax** |
|
Beneficiary drawdown |
Tax-free | Tax at beneficiaries’ marginal rate of tax |
* Subject to the Lifetime Allowance – any excess will be taxed at marginal rate income tax
** For a Trust (45%)/for a charity lump sum death benefit (conditions apply) tax-free