Question: What are the implications of your policies if I die before and after the age of 75?
Fiona Tait: - Scottish Life
Prior to age 75 it depends on whether you have crystallised your pension (taken any benefits).
• If no then the full value of the pension fund is available as a lump sum, almost certainly free of inheritance tax*.
• If yes then the value of the pension fund may be paid as a lump sum but will be subject to a 35% tax charge.
• As an alternative it is also possible in both cases to pay a pension income to, or purchase an annuity for, any financial dependents (but the majority of clients take the lump sum).
• Some clients chose to partially crystallise their funds in which case the above conditions apply separately to the relevant proportion of the plan.
After age 75
Any benefits not yet crystallised (cashed in) must be taken by age 75 at the latest. Following this
• there is no possible lump sum payment on death other than to a registered charity
• a dependent's pension may still be paid to, or annuity purchased for, a recognised financial dependent
This is a key reason why most clients choose to purchase an annuity by age 75 unless they have financial dependents still living.
*inheritance tax may be levied if HMRC feel that the pension plan has been used to avoid this tax, however they have confirmed this will not happen in the majority of cases
Stewart Dick - Hornbuckle Mitchell
"The answers will depend on the position of the pension at the time of death, with the basic details as follows:
Death prior to age 75 and the fund is still uncrystallised - i.e. no benefits taken. 100% of the fund will be available to the beneficiary as a lump sum which will be IHT free in the vast majority of cases as the pension is written under trust outside the member's estate.
Death prior to age 75 and the fund has been crystallised - i.e. benefits taken (N.B. This includes taking the Pension Commencement Lump Sum (PCLS), even if no income is being drawn). There will be a 35% tax charge with the remainder being paid to the beneficiary as a lump sum.
In addition to both of the lump sum options above, it is also possible for dependants to receive a pension income as an alternative.
In cases where a member has entered in partial drawdown - i.e. benefits have only been taken from a proportion of the fund, the tax charges will apply to the relevant proportion as appropriate.
Once the age of 75 is reached benefits must be taken - i.e. PCLS must have been taken by age 75 or it is lost, and income must be taken from age 75. This income could be in the form of an annuity, Alternatively Secured Pension (ASP) or Scheme Pension. We provide the latter two options.
Under ASP. While it is possible to pay a lump sum out to a beneficiary this will be treated as an unauthorised payment, with tax charges totalling 70%. In addition inheritance tax may well be payable, depending on the individual's estate. If IHT does apply this brings the cumulative tax charge to 82%.
It is also possible to pay a lump sum to a registered charity with no tax charge applying.
If a relevant dependant is in place a pension income will be paid to them from the remaining fund.
Under Scheme Pension. The basic position on death in scheme pension post 75 is as for ASP, although it is not possible to make a tax free payment to charity under these rules.
It's also possible for the member to have elected for a Pre Determined Term under our scheme pension. This means that if the member dies within the Term (set at 10 years from outset of scheme pension) the plan will continue to pay income to the beneficiary, taxed as income, for the remainder of the Term.
Further details on the death benefits available, the pros and cons of of USP, ASP and Scheme Pension and the mechanics of each, including the Pre Determined Term, can be found on our website (www.hornbuckle.co.uk) or directly from our team of local Trustee Consultants."
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