Death Bens, Ill Health, LTA, Protections

Question 1

List the possible Scheme Pension death benefits and associated tax treatment

Answer 1

Death pre retirement

• Dependents pension subject to scheme rules taxed as PAYE.
• Possible trivial commutation lump sum.
• No test against members LTA as no corresponding BCE.

Death post retirement

• Dependents pension depending on scheme rules (taxed as PAYE)
• Term certain guarantee of up to 10 years - continuing income taxed as PAYE in hands of dependent / nominated beneficiary and can’t be commuted.
• Pension Protection of 20 x basis less gross payments to date of death - tax free on death before 75 otherwise taxed as PAYE / 45% if to personal reps / trustee
• Possible trivial commutation lump sum if benefits are valued at less than £30,000
• Guarantee payments would form part of estate for IHT

Question 2

Death benefit options under a FAD and their taxation

Answer 2

Options are: -

• Lump Sum: Tax free if age at death under 75 and paid within 2 year window, otherwise taxed as PAYE (45% if paid to reps or trust)
• FAD: Dependents FAD (spouse or deps), Nominee FAD (children) or Successor FAD (successor to dependents or nominees FAD) - tax as above.
• Lifetime Annuity - tax as above.

Uncrystallised funds tested on death before 75 against LTA, otherwise no test.

Outside estate for IHT unless death within 2 years of transfer in which case HMRC may deem it a ‘transfer of value’

Question 3

Outline the factors to consider in respect of death benefits offered by DB vs FAD

Answer 3

• Health of member and dependents and family longevity.
• Any other pension provision

Scheme Pension

• Safeguarded benefit typically inflation protected
• Possible guarantee in payment
• Pension cannot continue to be paid to children unless they are dependent
• Dependents pension will always be taxed as PAYE even if member dies before age 75

FAD

• Dependent can choose whether to take a lump sum or income (Dependents FAD)
• Benefits tax free if member dies pre age 75
• Funds can be passed to children (successor FAD)
• Continuing investment risk unless a LIfetime Annuity is purchased

Question 4

Outline the advantages and disadvantages of a Spousal Bypass Trust relative to continuing in a Personal Pension Plan post mortem

Answer 4

• There’s no guarantee that the trustees of a PPP will carry out the members wishes as set out on their nomination form as the trustees have discretion
• The dependent can direct benefits from a PPP as they see fit, ignoring the original members wishes
• The member can specify the beneficiaries of the SBT, ensuring that both spouse and children benefit - the spouse can’t later change this.
• Dependent’s benefits from the PPP would be tax free if member death before age 75, whereas SBT income paid with a 45% tax credit i.e. trustees suffer 45% tax on investments
• If death post 75 PPP benefits taxed as PAYE, whereas a 45% tax charge suffered on nomination to the SBT
• In both cases funds remain outside the estate for IHT (unless later drawn from the PPP)
• Funds in the SBT not considered if dependent later goes bankrupt or divorced but will be subject to complex and costly trust rules

Question 5

Under what circumstances would the residual funds in a FAD fall back into the members estate on death?

Answer 5

HMRC deem a transfer of benefit a lifetime transfer of value, but only assign a value if: -

• The member is not in normal health at the time of the transfer
• Death occurs within 2 years of the transfer

In which case HMRC are likely to investigate and assign a value to the transfer

Question 6

Formula for indexing previously used LTA

Answer 6

RUA x (CSLA / PSLA)

Where

RUA = relevant untaxed amount (the amount of the previous BCE)

CSLA = Current standard LTA

PSLA = LTA at time of previous BCE

Question 7

Define eligibility for fixed protection

Answer 7

Cannot hold

• Primary Protection
• Enhanced Protection
• Previous years Fixed Protection
• Previous years Individual Protection

Cannot accrue further benefits post the cutoff date for the election e.g. 6th April 2016 for FP16

Question 8

Define eligibility for Individual Protection

Answer 8

Individual protection allows a member to continue to accrue benefits

• Cannot have primary protection
• Value of all pensions, including any previously crystallised, is more than the latest LTA but less than the LTA immediately before the year for which IP is available.