The changes to pension death benefits seem simple on the face of it, but there are still unanswered questions and possible planning opportunities to be had.
Will Pensions cause the Residence Nil Rate Band to Taper?
If you have total assets over £2m including pensions, will the taper apply? I have not been able to find a definitive answer either way, but I suspect the answer will be yes.
This will be an issue for couples where one partner owns more of the assets and dies first. Remember the taper has two bites of the cherry, so if someone who dies has over £2m, their RNRB tapers and is not available to the other spouse regardless of their eventual position on death. However, even if the full RNRB transfers, both can be tapered away if the spouse’s assets are above £2m. A way to manage this is to pass assets between each other during life, but this isn’t an option with pensions.
It’s always possible the final rules will say that the pensions aren’t in your estate but are counted for IHT. There is precedent, as when gifts are made, they count for 7 years for IHT but are ignored when calculating the RNRB.
We also have the downsizing rules to content with, if you have downsized and spent the proceeds, will you be allowed to apply the RNRB to your pension?
How will Charitable Gifts be dealt with?
Pension Death benefits are exempt from IHT and Income Tax if left to a Charity. Meanwhile, if you leave 10% of your estate to Charity you get a 10% discount on the IHT. Under the proposed system, we need to know if the pension counts as part of the estate for this rule.
Will leaving a portion of the pension equivalent to 10% of the overall estate trigger the rule? If it does, it might be better to make any Charitable donation from pension assets if possible since it might avoid Income Tax as well as IHT.
Apportionment of NRB, how will this go in practice?
As it stands pensions don’t have to wait for probate to be dealt with. From 2027 they probably will do. If this takes over two years it would then mean under 75 death benefits will become taxable as they likely can’t be appointed to beneficiaries until the IHT is sorted out.
From what’s been reported, it sounds like there won’t be much flexibility about the NRB but this might make things awkward where there is limited liquidity in either the estate or the pension. On the flip side, if there is full discretion on where to use the NRB, it could be manipulated. For example, under 75s could apply it to the to the estate, but over 75 to the pension, due to Income Tax treatment being different.
What about gifting? Could death bed gifting be used to ensure the Nil Rate Band is used in the estate rather than from the pension?
Can Nominating Death Benefits be manipulated?
Up until now there is really no upside to having pension death benefits paid into the estate (and usually this won’t happen anyway). However, estates pay income tax at 20%, so having death benefits paid into the estate of the deceased might actually be better than leaving them in drawdown if the end recipient is a Higher Rate taxpayer. It may also allow Deed of Variations to be used against pension death benefits, which could be used creatively.
For deaths under 75 where the money is being left a spouse, who will likely be over 75 when they die, there will be a good argument for withdrawing everything tax free during the life of the survivor.
It would be nice if HMRC, gave a concession to pensions left into the estate allowing schemes to pay out without worrying about IHT, as it will then be dealt with by the estate itself potentially avoiding the faff of apportioning the NRB.
Should Tax Free Cash be taken before 75?
At present it’s arguably better to take TFC at or before 75, if the money can be spent, given away or put in BR. This needs to be weighed against the extensive benefits of keeping the money in a pension environment over generations.
It’s now almost always going to be better to take TFC, since it it’s subject to IHT and Income Tax in the pension but only IHT in the estate.
What about “Staveley”?
Somewhat ironically, this issue of ill health transfers within 2 years is going to be resolved by extending the problem to everyone!
The new rules increase the burden on schemes. Arguably having less schemes will be easier to deal with, so there is an incentive to consolidate. However, you can still get caught by this 2 year rule before 2027. For people in poor but not yet critical health, you have decision to make, when considering whether to consolidate ahead of the new rules coming in.
Can you use BR in your pension?
I have seen nothing to say whether holding AIM shares, in your pension will qualify for 50% Business Relief or not.
Logic says it won’t, since the pension is a product, the same as if you hold an AIM Unit Trust or AIM VCT neither of which qualify. AIM ISAs do qualify because an ISA isn’t really a product as you own the assets inside the ISA directly. Nevertheless, confirmation would be nice?
Hopefully, the Treasury will address some of these points early so effective planning and preparation can take place. Remember, we are in unchartered waters, don’t go off half cocked!
philgq