Death Benefits and Transferring Ill Health

Question 1

DB scheme - Deferred Member. Likely to come up

Answer 1

Dependants scheme pension may be payable.
Taxed as PAYE

Income taxed as recipients pension taxed under PAYE

HMRC classes dependant as spouse, child under 23, interdependancy (sharing bills), parents
Scheme can set its own definition - likely to be spouse and child under 18 only

If no dependant available then pension will die

No test against LTA

May be able to commute for trivial lump sum if under £30,000

Question 2

DB scheme - Pensioner Member. Likely to come up

Answer 2

May be able to commute for trivial lump sum if under £30,000

Dependants scheme pension may be payable subject to scheme rules

Income taxed as recipients pension taxed under PAYE

May have a guarantee period of no more than 10 years. This is from date member commenced pension NOT date of death. This will be paid in full first before dependants pension

Liable for IHT

Question 3

Money Purchase Death Benefits

Answer 3

Lump Sum tax free is death under 75 and designated / paid within 2 year window

Otherwise PAYE

Flexi Access Drawdown

• Spouse = Dependant FAD
• Dependant Child = Dependant FAD
• Non dependant child = Nominee FAD

Lifetime Annuity

Usually outside estate for IHT but may be challenged as a ‘transfer of value’ if death occurs within 2 years of transfer

LTA -
tested if death before 75 and funds are uncrystallised
otherwise no test

Question 4

Spousal By-Pass Trust (SBT)

Answer 4

Can help mitigate IHT liability on 2nd death and outside beneficiaries estate

Complex and costly, with possibility of periodic and exit charge

On death after 75 funds paid into trust net incur a 45% tax charge

Majority of income within the trust taxed at 38.1% and 45%

Income paid form the trust with a 45% tax credit

Question 5

Transfer when in Ill Health

Answer 5

transfer deemed by HMRC as ‘lifetime transfer of value’

Value deemed ‘nominal’, so no IHT unless

• Member is in poor health AND
• dies within 2 years of transfer

In this instance HMRC will investigae and may allocate a value for IHT

Question 6

Protection Policies

Answer 6

Protection policies may provide an alternative to death benefits

Client may be able to retain generous revaluation rates and there’re inflation proof their retirement income

Drawbacks may be the cost of cover, and existing health issues which mean cover is not successfully underwritten