Following changes to pension tax rules on 6th April 2015, the use of trusts to receive lump sum pension death benefits on the death of a scheme member after the age of 75 has become less attractive, but this may need to be reconsidered in light of measures introduced in the Finance (No 2) Act 2015.
A 45% tax charge currently applies on the payment of lump sum pension death benefits to trustees on the death of a member after the age of 75, whereas individual beneficiaries are simply taxed at their marginal income tax rates on benefits they receive. Therefore, from a tax perspective, it has been better for an individual beneficiary to receive pension death benefits than a trust.
The measures introduced in the Finance (No 2) Act 2015 will redress this imbalance to some extent. The upfront 45% tax charge on the payment of lump sum pension death benefits to trustees remains, but the beneficiary of the trust will now receive a credit for the amount of the 45% tax charge that is attributable to the lump sum death benefits paid to them. The payment to the beneficiary will be treated as income in their hands for income tax purposes, and the credit will be deductible against that income and any other income in the tax year in which the payment is made to the beneficiary. The upshot is that, once in the trust, the benefits can be paid out with little or no further tax and the beneficiary may be able to use some of the credit as a deduction against their other income, depending on the rate of income tax applicable to them.
Trusts have important benefits in their own right, e.g. asset protection and control, which should make them worth considering in any event, but particularly so now.
James Mabey, Hunters incorporating May, May & Merrimans
If you would like further information about pension planning, please contact the partner at Hunters with responsibility for your legal matters, or any other partner in the Private Client Department.