Warning on lump sum tax liability for beneficiaries

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Warning on lump sum tax liability for beneficiaries

A pensions specialist has warned of how, following the Finance Act, pension scheme rules could mean an unexpected tax liability for beneficiaries receiving a lump sum.

Jon Greer, pension technical manager at Old Mutual Wealth, said: “It is important to understand how a pension scheme will deliver the new death benefit rules, and whether it will allow beneficiary drawdown if that is the client’s intention. Many schemes do not, and beneficiaries could be forced into receiving a lump sum, with the associated tax implications.”

Mr Greer also emphasised the need for advisers to remind clients of changes in the Act as the tax year end looms “particularly to pension input periods (PIPs) and death benefits. Both these changes, if responded to correctly, have real potential to benefit clients in the long run.”

He said: “For instance, there is the possibility of any arrangement having two or three PIPs ending in 2015/16, possibly giving a one-off opportunity to pay more money into a scheme by April than would have been possible beforehand.

“The other rule changes were as expected with no surprises.”

Mr Greer added: “The new main residence nil-rate band will come into effect, and will include the complicated calculation required for those who sell their property or downsize.”

The government’s rule changes also include the rules around multiple trusts, enabling people to benefit from multiple nil rate IHT bands provided they are set up (and topped up) on different days.

If each trust is less than £325,000 then there is no IHT to pay.

Adam Wareing, head of paraplanning for Cheshire-based Clarion Wealth Planning, said that completing and keeping a nomination form up to date could help pension scheme members avoid unnecessary tax liabilities owing to this “technicality in the rules that govern flexi-access drawdown”.

In order to avoid an unnecessary tax liability, he said people should keep a close eye on their finances.

Adviser view

Chris Burden, managing director of Farnham, Surrey-based restricted adviser RDS Financial, said, “Regarding death benefits, there is a particular problem with grouped personal pensions, where one organisation will allow flexibility and others may not. We have been doing a lot of consolidation work moving funds from schemes that do not allow flexibility to ones that do.”