Less than two weeks before the Budget, I put the finishing touches to an article for Money Management’s Sipp special report about the quirks of the death benefits rules. I talked about the plight of child dependants, unable to continue taking income in beneficiaries’ drawdown once they reach age 23 and cease to be a dependant. I lamented that it should be easy to fix – particularly with the introduction of nominees in April 2015 – and wondered if a correction would appear in a future Finance Bill.
I have since learnt an important lesson: it is probably best not to comment, however fleetingly, upon possible future legislation a few days before a Budget.
Still, it is hard to be annoyed in the face of such a positive change. There was no reason for the legislation to treat child dependants unfavourably: the rule was widely considered an error. Once the Finance (No.2) Bill 2016 is passed, child dependants will be able to continue taking income after turning 23, giving them the same treatment as other dependants and nominees.
In the grand scheme of things, the child dependant rule affects relatively few people, and could easily have been dismissed as unworthy of the effort required to change the legislation. However, it is not only good news for the young dependants who are already in drawdown.
Members already have plenty to think about when planning and discussing their death benefits. This quirk simply added another facet that needed consideration. Members can now name their children as beneficiaries without having to worry whether they might face restricted options or unexpected tax charges simply due to their age.
Additionally, while members choose their beneficiaries, in many cases the beneficiary chooses how they wish to receive the death benefits. Where the beneficiary was a child under 23, they (or their guardian) would need to have been made aware of the rule, making the decision all the more complicated. With this amendment, it will be simpler for beneficiaries to choose the option that suits them best, without the fear of complexity further down the line.
Most of all, this appears to be one of the rare occasions when a change actually simplifies a rule. In fact, this isn’t the only change in the small clutch of ‘technical amendments’ in the Budget report, which will make things easier for consumers, advisers and providers alike.
Serious ill-health lump sums will also see changes as a result of the Budget. These lump sums are available to members who are expected to live for less than 12 months, and are only available from fully uncrystallised pension arrangements. The lump sums are tax-free if the member is under 75; otherwise a 45 per cent tax charge applies.
Once the new legislation is in force, serious ill-health lump sums for members age 75 or over will be taxed at their marginal rate of income tax, putting the taxation in line with that of death benefits. This change was not wholly unexpected, as a similar amendment was made in April 2015 to keep the taxation of both aligned.
A more surprising amendment sees a relaxation of the rule regarding fully uncrystallised arrangements. Once the Bill is passed, serious ill-health lump sums will also be available from partially crystallised arrangements. They must still consist of uncrystallised funds only, and must still exhaust the uncrystallised funds in the arrangement from which they are drawn. However, this is still an improvement on the existing rules.
The Budget might not have produced the fireworks the industry expected, but these small changes will make a significant difference to members and their families during extremely difficult times.
Jessica List is pensions analyst at Suffolk Life
