3 unknowns about pension flexibility

I make it 7 weeks until 6 April and we are still awaiting final guidance on the IHT position.

Tread carefully with any conversations you are having in the run-up to 6 April, particularly in the IHT space when discussing pension flexibility.

There are still 3 things about pension flexibility that could have a serious impact on your clients wealth planning:

  1. The tax rate on the new BCE 5C  
  2. The rate of tax on any pension money being put into trust under pension flexibility
  3. The IHT position of nominations under pension flexibility

 

1. The tax rate on the new BCE 5C

Currently a member’s uncrystallised  death benefits are accessed against BCE7 (Death – did you ever see the film ‘Seven’; brilliant film with Morgan Freeman? You’ll never forget BCE7 again!) and any excess LTA is charged at 55%. This can be avoided if any (excess) benefits are used to provide a dependant’s pension (not a BCE currently).

Post-6 April the situation is different. It could now be charged.

Where a designation into a dependants’/nominees’ flexi-access drawdown (FAD) has been made by the member in respect of uncrystallised funds and the member died before age 75, these uncrystallised funds will be assessed against the deceased member’s remaining LTA, under a new benefit crystallisation event, BCE 5(C), which will be chargeable against LTA.

The rate of LTA excess tax charge via BCE 5C that will apply (on any excess LTA) has not yet been confirmed.

55% is charged by BCE 7 on excess LTA, when a death benefit lump sum is paid.

What rate is charged by BCE5C (death before 75 and using uncrystallised funds) on excess LTA, when FAD income is accessed (where FAD allows income and ”lump sums” to be taken…).

We don’t know how that is going to be accessed. Keep watching for HMRC updates.

 

2. The rate of tax on any pension money being put into trust

Death benefits paid from a registered pension scheme would normally (see below) be free of any liability to Inheritance tax (IHT) on 1st death (member’s death). This is currently a key protection for pension benefits (avoids a 40% hit).  Of course, on 2nd death there could be an IHT charge payable on their estate, if the proceeds of the pension are paid as a lump sum or income is accumulated in second person’s estate.

Often, pension planning involves the use of a (spousal bypass or pilot) trust to move the pension proceeds away from the estate on 1st death into a trust accessible by the dependent, thus avoiding IHT on 2nd death (and beyond). This is legitimate tax and wealth/estate planning.  There are occasions where IHT could be applicable; for example where someone who is seriously ill makes a decision which reduces the tax on their estate – and does it knowingly. This might happen if they transfer it into a trust for example and this ‘transfer of value’ would be assessed for IHT and there are still those contracts which aren’t held on trust, like a s32 buyout contract or retirement annuity s226.

Trust planning is still an option post-April 2015.

But, what is the tax rate for moving the proceeds into a trust under the new regime post-6 April:

Under what conditions is the designation of pension monies into trust tax free?

When is it taxable and at what rate?

There are a lot more conversations going to be taking place about use of trusts outside/alongside the new pension flexibility and we await more details to help with that. Keep watching for HMRC updates.

 

3. IHT position of nominations

There’s no doubt the successor planning arrangements outlined under the taxation of pension act 2014 [TOPA 2014] could be a very useful planning tool for wealth managers and financial advisers. I’d go so far as to say that, apart from UFLPS, this is the most critical thing in TOPA 2014; death benefit planning for your pension and securing family pension wealth for generations.

Remaining funds on the death of a (money purchase) pension scheme member can be passed on in one of two ways: as a lump sum or as a beneficiary’s flexi-access drawdown (FAD).

I wonder if the HMRC intended that the the remaining lump sum (crystallised or uncrystallised member funds) will continue to generally be managed under an expression of wishes within the scheme trustees discretionary powers and outwith the scope of IHT; saving 40% IHT tax?

Or do the HMRC mean something new and different?

TOPA 2014 enabled these payments (lump sums and FAD) to be made to a beneficiary nominated by the member (or by the scheme administrator, where is there is no living dependent).

Now, the question (still to be confirmed) is this; does this ‘nomination’ remove any discretion from the scheme trustees?

If it does, it could potentially be chargeable to IHT and hit any succession planning by 40% and put pilot trusts right back in the front seat?

Not only that, could IHT apply to both member nominees and successors pension funds on the way down?

Here’s the video to explain it in pictures:

https://www.vimeo.com/

 

These are questions still to be answered for you to be fully prepared for 6 April; I expect that HMRC will be making decisions on these issues as we speak. Keep watching for updates from HMRC. It’ll be interesting when they do arrive.

To help you on your way meantime (because there is still plenty to get your head around), we have just announced 2 workshops designed to fully explore these questions and develop your understanding of these issues and more.

The workshops are completely unbiased of any provider product sponsorship. The technical content of these workshops is aimed at those with a good and strong technical competence, probably established through operating at or qualified at AF3 Level 6. We will investigate these issues at a deeper technical level to make sure you are fully prepared for anything that comes your way post-6 April.

The details of our Milton Keynes workshop can be found here

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If you can’t make the workshops, we have our online support here:

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Meantime, have a great week and look out for the HMRC guidance notes coming out anytime soon!

This guidance is unbiased. It’s technical. And it is not sponsored by any product provider.