Getting pension and savings options straight - Veterinary Practice
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Getting pension and savings options straight

Dylan Jenkins provides an update on pension death benefit options and looks at the new Lifetime ISAs, due to come into effect in April 2017.

on the
revised pension death benefit options
as well as some further information on
the new Lifetime ISAs (LISAs) that will come into force in April 2017.

A recap on pension death benefit options

I have mentioned in previous articles
that there are a number of options for
the payment of
your pension
fund on your
death and these
offer enormous
for tax
planning and
passing wealth
down through generations of your

I will just mention that these rules
are applicable to money held in
pension funds and may not apply to
occupational defined benefit schemes
or annuities that are already in

Firstly, I will summarise the basic

  • Death benefits can be paid to any
    beneficiary (older rules were far more
  • Where the deceased is under 75 and
    the death benefits are designated to a
    beneficiary within a two-year period,
    benefits will usually be paid free of all
  • Where the deceased is over 75, or if the death benefits are not designated to a beneficiary within two years, benefits will be subject to tax.
  • On the death of a beneficiary, any remaining funds can be passed on again. It is the age of the beneficiary
    at the date of their death (i.e. whether
    they were aged over or under 75) that
    dictates whether funds are taxable, not
    the age of the original member.

eligible for
death benefits
will have
the option
of leaving
the money
invested and
drawing a pension under the new flexi-access
drawdown rules. This means they can
take income as and when required,
with no limits and no need for reviews.
This presents a huge opportunity for
wealth and estate planning.

There are some interesting points
to note about these rules – and an
important one relates to who can
receive the death benefits.

There are no restrictions on the type of beneficiary
who can receive lump sum death
benefits, so a lump sum can be paid
from the pension on your death to
anyone you have nominated or anyone
the Trustees determine should benefit
(this is important, for example, if you
had not made any nomination).

This is all well and good, but if you
are over age 75 at the time of your
death the lump sum is taxed as income
when it is paid out from the pension,
so if this is all paid out in one year it
may prove very inefficient from a tax
perspective, and this lack of option
does not enable efficient planning.

It may be much more efficient and
desirable from many viewpoints for
a beneficiary to have the option to
leave the money in the pension fund
and receive pension income from the
deceased member’s fund, not least
because they can then be taxed on a
small part of it annually to enable them
to plan this more efficiently.

There are
just three classes of beneficiary entitled
to receive pension income:

  • A dependant – this is defined as
    someone who was a dependant of the
    original scheme member at the time of
    their death. Examples include a spouse
    or child under the age of 23, but it is
    restrictive, particularly for grown-up
    children who are no longer classed as financially dependent.
  • A nominee – this can be anyone
    who has been nominated by the
  • A successor – anyone nominated by a dependant, nominee or successor to
    receive any remaining benefits on their
    subsequent death. Importantly, there is
    no limit on the number of successors,
    so in theory the fund could be passed
    on for generations if it is not all taken

I will repeat that if a beneficiary does
not fall into one of these three classes,
they will not be able to receive death
benefits as a pension – only as a lump
sum – thereby potentially restricting
the options open to them. A similar
restriction applies after the death of a
dependant, nominee or successor.

It is therefore more important than
ever to nominate anyone you may want
to be able to take a pension income
from your fund after your death. You
may think your spouse should have
all of the fund, as they may need this.
However, by nominating your children
or a Trust to receive a small amount of
(say) 1% of the fund each, this gives
more flexibility.

The Trustees have the power to
change the amounts providing the
individual has been nominated. So in
this example, after your death, if your
spouse felt that in reality they did not
need all of the fund and would prefer
the children to have some bene t
earlier in a tax-efficient manner, they
can agree to increase the percentage
paid to them, which would not be an
option if they had not been nominated
at all.

I have not covered the position
here with regard to the interaction
with the Lifetime Allowance as this is complex and may need additional
considerations, and will not change
the point that nominations in line with
your wishes are vital.

The new Lifetime ISAs

The Lifetime ISA (LISA) is being
introduced in April 2017 and is
aimed at helping younger people
simultaneously to save both for a first
home and their retirement, without
having to choose one over the other
when starting to save.

It is widely felt that this may be a
precursor to the abolition of pension
tax relief, something we will just have
to wait and see, so I will not speculate
on that here!

The LISA will be available to anyone
aged under 40. The individual will be
entitled to save up to £4,000 in each
tax year. The LISA investment forms
part of the normal ISA subscription
(which will be £20,000 from April

The government will add a 25%
bonus on the contributions paid in a
tax year at the end of that tax year and
contributions with the government
bonus can be made from age 18 to 50.
So, if you invest the full £4,000 in a tax
year, there will be a £1,000 government
top-up (just like a pension).

You will notice that, although you
can only start saving in a LISA before
the age of 40, once you have started
you can continue to receive tax benefits
until age 50. In fact, contributions
without any government bonus can
continue after 50 – but this is just like
any ISA at that stage so I do not see
why an individual would use a LISA
over the standard ISA for savings post-50.

LISA funds (including the
government bonus) can be used to
buy a first home up to £450,000 at any
time from 12 months after opening the
account. Any withdrawal going towards
the purchase of a first property will be
paid direct to the conveyancer along
with the government bonus – this
cannot be paid to the LISA holder or
the bonus is lost.

Any withdrawals not related to a first
property purchase can be made at any
time but, if the saver is below age 60,
the government bonus (together with
any growth on the bonus) will be lost
and a 5% charge will be payable.

From age 60, the saver is free to
make full or partial withdrawals at any
time tax-free and with no charge. If
funds are left within the LISA they will
continue to receive tax-free growth/income as for an ISA at present.

Savers will be able to contribute to
one LISA in each tax year, as well as a
cash ISA and a stocks and shares ISA,
within the new overall ISA limit of
£20,000 from April 2017.

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