There’s no denying that recipients of death benefits have it much better under the current rules than they did before the pension freedoms.
The rules might not be quite as straightforward, but death benefits can be much more flexible and more tax efficient now than they were previously.
I’ve said before that I can’t bring myself to be particularly annoyed about the complexity of the death benefits rules. Of course, any unnecessary complexity in pensions generally is a bad thing and unhelpful to consumers.
However, in this specific instance, it also seems reasonable that there are a few hoops to jump through when there could be six-figure, or even seven-figure sums being removed from owing any income or inheritance tax.
That said, there is one element which seems especially unfair to me.
Scheme members have the option to transfer their pension if their provider doesn’t offer the benefit option they want to use. Beneficiaries don’t.
Once a beneficiary is in drawdown they can change provider as much as they like, but if someone dies with a pension scheme which doesn’t offer beneficiaries’ drawdown, the beneficiary will be stuck without that option. There are a few interlinked reasons for this.
Firstly, the definitions of dependants’ and nominees’ (and successors’) flexi-access drawdown require the funds to have been designated as such within that arrangement, or transferred to a new arrangement on a like-for-like basis (e.g. from one nominees’ flexi-access drawdown arrangement to another nominees’ flexi-access drawdown arrangement).
Therefore, if funds are in beneficiaries’ drawdown, there are only two possibilities: either the funds were transferred to that arrangement from another beneficiaries’ drawdown arrangement, or they are in the same place where they were originally designated after the previous owner died. In either case, the provider holding the funds when the individual died would have designated the funds to beneficiaries’ drawdown.
At this point, you may be wondering if it’s possible for the scheme where the member died to transfer the funds to another scheme in order for them to designate the funds to beneficiaries’ drawdown. Unfortunately, there are issues here too.
As the death claim hasn’t been settled, the funds will still be in the deceased member’s name.
It won’t be possible to transfer the deceased member’s pension to a new provider: most will probably be reluctant to establish a plan for, and enter into a new contract with, someone who is no longer alive.
It also isn’t possible to transfer the benefits directly into a new plan in the beneficiary’s name: the legislation doesn’t allow a pension to change owners during transfer, unless as a result of a pension sharing order.
Besides, the money couldn’t transfer to the new scheme as drawdown funds as it wouldn’t be on a like-for-like basis, so could only possibly be treated as uncrystallised.
So even if it was possible for the funds to change hands, they would now be uncrystallised in the beneficiary’s name, and therefore couldn’t be designated to beneficiaries’ drawdown.
Of course, all of this also overlooks the fact that transferring funds out of a deceased person’s pension into another pension is not a legitimate way to settle a death claim and would therefore almost certainly be an unauthorised payment.
As far as problems go, it’s pretty airtight.
Unintended consequences
Particularly for something which doesn’t appear to have been an intentional part of the design. The situation seems to have occurred due to a combination of default and omission: the problems outlined above were either as a result of existing legislation simply being extended to beneficiaries, or would have required new legislation to address.
What we’re left with is a situation which doesn’t benefit anyone.
Millions of individuals whose pensions are suitable for their requirements may be left wondering if they need to a transfer to a new, potentially less suitable product which will also work for their beneficiaries.
Advisers may find themselves trying to balance these requirements for their clients, concerned about either putting too much or not enough emphasis on beneficiary options.
And beneficiaries may end up paying significantly more tax than would be necessary. All because of what seems to be a gap in the legislation.
Jessica List is pension technical manager at Curtis Banks Group
The post Jess List: Death benefits may be flexible, but legislation isn’t appeared first on Retirement Planner.