With Valentine’s Day fast approaching… how much do you really care for your loved ones?
In recent articles, we have been discussing some of the options that expatriates now have, to transfer their UK pensions away from the continuing and ever increasing HMRC (UK) tax burdens. However, despite having been able to do this since April 2006, the majority of expatriates have still not moved their accumulated pensions from the UK. With just over 8% transferred so far, of an estimated £600BN still in the UK, why is this?
So with another Valentine day just around the corner, a time when we traditionally show our love for those that matter, I thought it might be useful to look at what happens upon death with some of the various pension arrangements that people may have and the importance of that to the loved ones we leave behind.
Death Benefits from a State Pension
Your basic State Pension is paid only to you, and can’t be passed on to someone else when you die. However, if you chose to put off claiming your State Pension (deferral), your surviving spouse or civil partner may be entitled to some of the deferral amount you had built up.
If you have contributed towards an additional State Pension your spouse or civil partner may get some of this additional pension when you die. This additional State Pension was formerly known as the State Earnings-Related Pension Scheme (SERPS) or State Second Pension.
Tax on death benefits from a company pension
If you die before starting to draw your company pension
Most company pensions provide for a ‘Death-in-Service’ benefit, similar to a life assurance policy. This means that if you die before starting to draw your company pension a lump sum is paid to a chosen person (known as the ‘beneficiary’).
The money can be paid free of Income Tax if it’s not worth more than the pension holder’s available ‘lifetime allowance’ (£1.5 million in tax year 2012-13). Any excess amount above the lifetime allowance will pay a tax charge of 55 per cent. This tax is paid by the beneficiary.
If you die in service, some pension schemes pay a dependants’ pension. A dependants’ pension counts as taxable income for the beneficiary.
If you die after you start to draw your company pension
If you die after you start to draw your company pension any pension protection or annuity protection lump sum death benefit paid following your death will be taxed at a special lump sum death benefits rate. The Income Tax rate payable is 55 per cent and will be paid by the scheme administrator.
If a dependant’s pension is provided it counts as taxable income for that dependant.
Tax on death benefits from a private pension
If you die before taking any benefits
If you die before taking any benefits, the death benefits are normally paid as a lump sum. This usually consists of the return of the pension fund together with the proceeds of any life assurance.
If the amount of the lump sum – plus the value of any other registered pension scheme benefits – exceeds the Lifetime Allowance (£1.5 million in tax year 2012-13) the excess is taxed at 55 per cent. The beneficiary has to pay this.
Death benefits can also be used to provide dependants’ pensions instead of being taken as a lump sum. If a dependant’s pension is provided this counts as taxable income for that dependant.
If you die after taking benefits
If you die after taking benefits, any death benefits payable as pension income to a dependant will be taxed as income in the normal way. If the pension scheme provided for a lump sum payment this will be taxed at 55 per cent and will be paid by the scheme administrator.
Tax on a transferred (QROPS) pension
A QROPS member can be safe in the knowledge that, upon death at ANY time, his or her entire fund will be paid to the beneficiaries FREE OF ALL TAX. That means that a 100% tax-free lump sum can be paid to your spouse, or any other beneficiary that you wish.
When it comes to your financial planning, it is vital that you are aware of the situation you will leave behind for your loved ones, in the event of your eventual death. It can be hard to understand the impact of, for example, not making a will or perhaps not having an up to date ‘nomination of beneficiary’ form lodged with your pension providers.
One thing which is crystal clear though is that, if you fail to leave clear instructions about what will happen when you die, then those decisions will be made by others after your death. Tax on death, is a ‘lazy’ tax and can be avoided in most instances with careful and proper planning. As with all such decisions, it’s vital that you seek advice from a qualified financial advisor, so please feel free to contact us for a free and impartial assessment of your current situation.
WHO KNOWS, IT COULD BE THE BEST VALENTINE’S GIFT YOU EVER GIVE!!
The above article is reproduced by Asia Pacific Pensions who can be contacted either by email at [email protected] or alternatively by telephone on either 038 074644 or 0800 178 269.
The information provided in this article is not intended to offer advice. It is based on Asia Pacific’s interpretation of the relevant law and is correct at the date of printing this article. While we believe this interpretation to be correct, we cannot guarantee it.