Death and drawing of benefits
This is not the most uplifting topic, but it is essential that members to know what can happen to their scheme.
Where will your funds go in the event of death? When an individual dies it is irrelevant whether their funds are crystallised.
In brief - Tax Charges on Lump Sums:
Pre 75 death – Nil if 'designated' within two years of death – recipient's marginal rate if designated after two years
Post 75 death – 45% for the tax year 2015/16 – recipient's marginal rate thereafter
As an alternative to paying a Lump Sum on death, a drawdown pension can be paid to any beneficiary upon death, and eventually their successor.
Death before age 75
Crystallised or uncrystallised funds can pass on completely tax free to any beneficiary (who does not need to be a dependent) as a lump sum or as a drawdown pension (up to the lifetime allowance). Anyone who dies below age 75 who hasn't yet started their pension, or is taking a drawdown pension, can give their remaining SSAS pension pot to anyone as a lump sum death benefit or as flexi-access drawdown completely tax-free.
Death after age 75
Any beneficiary can take pension drawdown at their marginal rate. Assets can remain in your SSAS for years after death, benefitting from tax free growth an income, and potentially providing an income for your beneficiaries and their beneficiaries for years to come.
Pension scheme members need to nominate Beneficiaries who can receive benefits from an individual’s fund on their death. The Beneficiary does not have to be a dependant and can be anyone nominated by the deceased member. The Beneficiaries nominated by the deceased member will 'inherit' their remaining accumulated fund. Regardless of whether the deceased member had crystallised their pension fund or not, if they died before age 75, any payments made to the Beneficiaries are paid tax-free provided they are designated for payment within two years of the member’s death. Any uncrystallised funds on death before age 75 will be tested against the Lifetime Allowance at that time. Where the member dies after age 75 all payments are subject to the Beneficiary’s marginal rate of income tax. If the whole inherited fund is withdrawn in one lump sum, the tax payable will be 45% until the 2016/17 tax year. This means that it is likely to be preferable for pension scheme members to commence their retirement benefits by withdrawing their maximum tax free lump sum on reaching age 75 because the remaining fund on death will be taxable. Beneficiaries can choose to receive their withdrawals from the inherited fund in any of the following forms: Uncrystallised Funds Pension Lump Sum (if they inherit uncrystallised pension funds), Flexi-Access Drawdown or annuity purchase. If a Beneficiary dies with unused inherited funds, these can be passed to a nominated successor to pay a successor’s Flexi-Access Drawdown Fund or Flexi-Access Drawdown Lump Sum death benefit. Similar changes have been made in respect of annuities so that pension death benefits from money purchase arrangements in the form of an annuity can be paid to anyone, not just a dependant, and payments from the annuity can be made tax free where the member died before age 75. The serious ill-health lump sum tax charge for immediate payment of a member’s total fund on early retirement on serious ill health grounds is 45%. The option to nominate a charity to receive a tax-free Charity Lump Sum death benefit is available.
Drawdown following death can be passed on for generations; the tax treatment varies depending upon the ages of the successor, as detailed in the following example:
1st death – member aged 80 – nominee income taxable at marginal rate
2nd death – nominee aged 71 – successor income not taxable
3rd death – successor aged 80 new successor income taxable at marginal rate
This means that the tax advantages of pensions can be retained and benefit investment growth potentially for generations so long as withdrawls are carefully measured. SSAS is therefore an excellent inhertiance planning tool.