Section 6 - Tax Treatment Of Benefits

Question 1

What is the normal minimum pension age

Answer 1

Currently 55, rising to 57 in 2028

Question 2

Under what circumstances can benefits be paid earlier than the normal minimum pension age

Answer 2

• Ill health - options are scheme pension, lifetime annuity, drawdown, trivial commutation lump sum payment, a

• small pots payment or UFPLS for DC schemes If serious ill health - less than 12 months - can only be paid from uncrystallised funds - can be commuted for a serious ill health lump sum. Where some benefits already crystallised - balance of uncrystallised funds can be paid as serious ill health lump sum. Trivial commutation/small pots payment not tested against LSA/all others are

• Certain occupations if entitled prior to 6 April 2006 - A-Day - Lump sum allowance (LSA) and Lump Sum & Death Benefits Allowance (LSDBA) reduced by 2.5% for each complete year benefits are taken before normal minimum pension age

Question 3

What are transitional protections

Answer 3

Transitional protection for members of occupational schemes who contractually entitled to take benefits from 50 if the rules allow this

the provision must be in the rules before 10 December 2003 and all benefits are taken in full Normal pension age to be increased in line with SPA - from 2028 age 57 (will always be 10 years earlier than SPA)

New transitional protection to be introduced for members who prior to 2028 had an unqualified contractual entitlement to take benefits from the age of 55. The right needed to be in the scheme rules on 11 February 2021.

Question 4

What are small pots payments

Answer 4

• £10,000 or less
• Not tested against the member’s LSA
• Not necessary for the member to have any LSA remaining
• Does not trigger MPAA
• In respect of uncrystallised funds:
- 25% is tax free
- 75% taxed as income under PAYE
• In respect of crystallised benefits entire payment is taxed as income under PAYE

Question 5

What is a trivial commutation lump sum payment

Answer 5

• Benefits in a DB scheme and since 16.09.2016 includes also in payment DC in-house scheme pensions
• Value of total pension benefits is not more than £30,000
• Can be paid as cash lump sum rather than income
• Tax treatment is same as small pots payment
• Trivial commutation lump sum payments from a DC in-house scheme pension or a DB scheme that is in payment and is less than £30,000
• All will be taxed as pension income.

Question 6

What is a serious ill health commutation

Answer 6

• Where life expectancy is less than one year can commute uncrystallised funds for a ‘serious ill health lump sum’
• Where some benefits already crystallised - balance of uncrystallised funds can be paid as serious ill health lump sum.
• Must be some LSDBA remaining but other than this no limit on amount paid
• Under 75 tax-free up to LSDBA - excess taxed as income
• Over 75 - whole lump sum taxed as member’s pension income via PAYE

Question 7

How are the benefits of income from a secure pension taxed

Answer 7

• Either via a scheme pension (DB can only offer scheme pension or DC if the member has been first offered a lifetime annuity) or buying an annuity (if flexible annuity chosen - trigger event for MPAA)

• Both scheme pension and lifetime annuity income taxed as member’s pension income via PAYE

Question 8

How are the benefits of income from a drawdown pension taxed via PAYE

Answer 8

• Capped - only for those already in capped drawdown before 6 April 2015
• 150% of the basis amount
• Can convert to flexi-access but will trigger MPAA once an income is drawn
• Flexi-access - no limits on amount drawn - as soon as payment taken MPAA rules triggered for that year and following years - taxed as income under PAYE

Question 9

How are flexible payments taxed under PAYE

Answer 9

• Taxable portion of any flexible payment is taxed using PAYE
• Where HMRC not issued a tax coding notice to the payments from the scheme taxed on a ‘month one’ basis
• 1/12 of personal allowance and tax bands are applied to the payment
• This can mean too much tax paid
• If payments are going to be regular HMRC will issue scheme with a tax coding notice

Question 10

Who are the defined possible beneficiaries of death benefits

Answer 10

• dependant
- Member’s widow(er) or civil partner
- Child under 23
- Child 23 or over but dependent due to mental/physical impairment
- Not married/civil partnership but financially dependent/mutual dependence/dependent due to mental or physical impairment

• Nominee is any individual other than a dependant

• Successor is individual nominated by a dependant or a nominee

Question 11

To whom can the following pension types paid death benefits to

Scheme pension, Lifetime annuity, flexi-access drawdown and lump sum

Answer 11

Scheme pensions must be paid to a dependent

The rest can pay to a dependent, nominee or successor

Question 12

What is the 2 year window

Answer 12

death benefits must be designated to an income producing contract or paid out as a lump sum death benefit within 2 years of death

If this does not happen typically the beneficiary does not enjoy any tax benefits, and must pay the tax on the money they receive at their marginal rate of income tax or if a trustee at 45% (lump sum death benefit charge)

Question 13

For lump sum death benefits paid on or after 6 April 2024 from uncrystallised or unused funds, how are they taxed

Answer 13

• Death before age 75/designated within 2 years
- If within LSDBA paid tax-free
- Any excess charged to beneficiary taxed at marginal rate via PAYE
- Previously LTA excess benefits were subject to 55%
- LTA excess tax charge

IF Outside 2 years - taxable
- No test against LSDBA
- To beneficiary taxed at marginal rate via PAYE
- To trustees taxed at 45% (lump sum death benefit charge)

• Death after age 75
- Taxable
- No test against LSDBA
- To beneficiary taxed at marginal rate via PAYE
- To trustees taxed at 45% (lump sum death benefit charge)

Question 14

For lump sum death benefits paid on or after 6 April 2024 from a DB scheme, how are they taxed

Answer 14

• Death before age 75/designated within 2 years
- If within LSDBA paid tax-free
- Any excess charged to beneficiary taxed at marginal rate via PAYE
- Previously LTA excess benefits were subject to 55%

IF Outside 2 years - taxable
- To beneficiary taxed at marginal rate via PAYE
- To trustees taxed at 45% (lump sum death benefit charge)

• Death after age 75
- Taxable
- No test against LSDBA
- To beneficiary taxed at marginal rate via PAYE
- To trustees taxed at 45% (lump sum death benefit charge)

Question 15

For lump sum death benefits paid on or after 6 April 2024 from annuity protection lump sum, life annuity, pension protection lump sum, how are they taxed

Answer 15

death before age 75
• No tax
• Provided it is within the LSDBA
• Excess taxed as recipient’s income under PAYE

Death after age 75
• Taxable
• To beneficiary at their marginal rate via PAYE
• To trustees at 45% (lump sum death benefit charge)

Question 16

For lump sum death benefits paid on or after 6 April 2024 from lump sum death benefits paid if drawdown capped or flexi, how are they taxed

Answer 16

Before age 75 death of member or dependant in drawdown where dependant’s drawdown Started before 6 April 2015
• No tax if paid within 2 years
• No LSDBA test if in capped drawdown, this is the only difference between flexi and capped in the taxation of lump sum death benefits

IF After 2 years then it’s taxable
• To beneficiary at marginal rate via PAYE
• To trustees at 45% lump sum death benefit charge
• No LSDBA test

Death of member or dependant in drawdown after age 75 (where dependant’s drawdown started before 6 April 2015)
• Taxable
• To beneficiary at their marginal rate via PAYE
• To trustees at 45% lump sum death benefit charge
• No LSDBA test

Question 17

For lump sum death benefits paid on or after 6 April 2024 from trivial commutation lump sums, where survivor commutes their Life time annuity/scheme pension or member dies within guaranteed period of life time annuity / scheme pension, how are they taxed

Answer 17

• In all cases payment taxed as recipient’s income under PAYE

• Whether member’s death before 75 or not Whether a scheme pension or lifetime annuity

• In both cases, maximum amount is £30,000 (per scheme)

• More than this is taxed as unauthorised member payment

Question 18

For lump sum death benefits paid on or after 6 April 2024 from Charity lumo sums on death, how are they taxed

Answer 18

• Tax free/no charge on scheme administrator No charge on charity if money used for charitable purposes

• If not used for charitable purposes taxed as unauthorised member payment

Question 19

For death benefits paid as continuing income from payments made under a guarantee, how are they taxed

Answer 19

Under scheme pension
• Taxed on recipient under PAYE
• Regardless of whether death before or after 75

From a lifetime annuity - death before 75
• Not taxed

From a lifetime annuity - death after 75
• Taxed at marginal rate via PAYE

Question 20

For death benefits paid as continuing income from dependants scheme pension, how are they taxed

Answer 20

• Taxed as income under PAYE
• Regardless of whether death before or after 75

Question 21

For death benefits paid as continuing income from survivors annuity where member set up joint life annuity with contingent interest paid to either dependent or nominee, how are they taxed

Answer 21

• Member dies before 75 and income received by survivor after 6 April 2015 - no tax on income

• Member dies after 75
- taxed under PAYE

Question 22

For death benefits paid as continuing income from survivors annuity set up by beneficiaries to buy life time annuity for beneficiaries, how are they taxed on

Uncrystallised funds and undrawn funds

Answer 22

Member dies before 75 with funds used to buy a dependant or nominee lifetime annuity
• uncrystallised
- Income tax free if paid within 2 years
- After 2 years taxed as income taxed under PAYE
• Undrawn
- income is free of tax

Member dies after 75 with funds used to buy a dependant or nominee lifetime annuity
• Income taxed under PAYE for both uncrystallised and undrawn

Dependant, nominee or successor dies before 75 with undrawn funds used to buy a successor lifetime annuity
• Income is tax free

Dependant, nominee or successor dies after 75 with undrawn funds used to buy a successor lifetime annuity
• Income taxed under PAYE

Question 23

For death benefits paid as continuing income from dependants capped drawdown, how are they taxed

Answer 23

Dependant’s capped drawdown set up before 6 April 2015 and income started before 6 April 2015
• Income taxed on beneficiary under PAYE

Set up before 6 April 2015 but no income taken until after this date and previous holder died before 75
• Free of income tax

Dependant’s capped drawdown set up before 6 April 2015 but no income taken until after this date and previous holder died aged over 75
• Taxed as beneficiary’s income under PAYE

Question 24

For death benefits paid as continuing income from dependants nominees or successors flexi-access drawdown, how are they taxed

Answer 24

Previous holder of FAD dies before 75
• Free of income tax

Previous holder of FAD dies after 75
• Taxed under PAYE

Question 25

For death benefits paid as continuing income from a member or dependant who dies in capped drawdown on/after 6 April 2015 and cannot stay in capped drawdown, how are they taxed

Answer 25

Member or dependant dies before 75
• Free of income tax

Member or dependant dies after 75
• Taxed under PAYE

Member dies before 75 with uncrystallised funds
• Free of income tax if within 2 years
• After 2 years taxed under PAYE

Member dies before 75 with uncrystallised funds
• Free of tax if paid within two years

Member dies after 75 with unused funds designated to FAD
• Income taxed as PAYE
• No test against the LTA

Question 26

When setting up a survivors annuity to be used to buy an annuity by the beneficiaries for the beneficiaries, from what funds must they use

Answer 26

Dependant or nominee purchase can be from either uncrystallised/unused or from undrawn funds (in drawdown)
Successor purchase can only be from undrawn funds

Question 27

IHT treatments of death benefits

Answer 27

• Via an expression of wishes no IHT if payment is made within 2 years
• Since 6 April 2015 funds in a DC scheme can be passed on as a lump sum or income
• Taxation of Pensions Act 2014 allows benefits to be ‘nominated’ - still no charge to IHT