The inter-generational pension plan

Pension Plans

Would you like your great grandchildren to draw on your pension fund to cover their university fees or a deposit on their first home? Pension reforms could mean that your pension plan can pass down from generation to generation.

It may sound far-fetched, but legislation currently going through parliament I makes the option possible. If the rules are unchanged, then for death benefits paid from money purchase pension schemes after 5 April 2015 they will be the following:

On your death before age 75

The value of your remaining pension fund can be paid as a tax-free lump sum on your death before age 75 regardless of whether you have started to take income using the new ‘flexi-access’ drawdown rules provided you have sufficient lifetime allowance available.

As an alternative, the fund will be able to provide drawdown for a dependant or other nominated beneficiary. Income payments will be tax-free to all recipients. Annuities will also escape income tax, following an announcement in the Autumn Statement.

On your death on or after your 75th birthday

The same options for dependants and nominees will apply, but the tax treatment will be different. The lump sum will be subject to a flat rate tax charge of 45% in 2015/16 (and at the recipient’s marginal income tax rates thereafter. Any income is fully taxable on the recipient.

On the death of a dependant or nominee using flexi-access drawdown

If your dependant or nominee (after you die) chooses flexi-access drawdown to take the income from your pension fund, then on their death the same rules based on their age when they die will apply to their residual fund; but the only way they will be able to take income from the fund will be flexi-access drawdown. And the rules will then apply to their successors and so on down the line until your original fund is exhausted.

The key point is that after your death, if funds are to pass down through generations, then beneficiaries must choose flexi-access drawdown, rather than a lump sum or other income option.

The new death benefit rules mean that your pension planning is more than ever linked to your estate planning. Indeed, once the legislative dust has settled, a combined review of your retirement and estate planning is likely to be necessary.

The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax and pensions laws can change. The Financial Conduct Authority does not regulate tax advice.

 

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The information in this article does not constitute advice and should be used for informational purposes only. This content has been provided to Helm Godfrey by Taxbriefs.