Could your employer’s Death in Service damage your pension?06 July 2015
David Smith, Financial Planning Director at Tilney Bestinvest flags that if the total value of the death in service pay-out plus the cumulative value of the deceased’s pensions exceed the Lifetime Allowance, a tax charge of 55% could be payable on the excess
David Smith comments: “Today many employers look to provide their employees with death in service benefits which, thanks to tax relief on premiums and increasing longevity, are considered relatively economical in relation to the level of benefits provided.
“Typically, in the event of a successful claim, the death in service benefit is paid out to the deceased’s beneficiaries. As death in service schemes are subject to rules of registered pension schemes, the maximum amount that can be paid out before a tax charge becomes due is currently £1.25m, and £1m with effect from April 2016.
“You’d be forgiven for thinking that a maximum pay-out of £1m is more than enough headroom for all but the higher earners, but the Lifetime Allowance needs to accommodate the deceased’s entire lifetime pension savings too. Consequently, if the total value of the death in service pay-out plus the cumulative value of the deceased’s pensions exceed £1.25m now, or just £1m with effect from April 2016, a tax charge of 55% could be payable on the excess. Those approaching retirement with larger salaries and pensions funds should therefore certainly look at their current arrangements.
“Aware that this could cause an issue, the Government has allowed the introduction of ‘excepted’ life policies, such as Relevant Life policies which circumvent this problem. Like death in service, pay-outs from a Relevant Life policy are tax free, and the premiums are tax relievable for the employer. Furthermore, the premiums are not classed as a benefit in kind for the employee. Above all though, the amount paid out would not be tested against the Lifetime Allowance and therefore no liability to a 55% tax charge. There are points to note however; excepted plans such as Relevant Life policies can only be written on a single life basis and the applicable premiums could be higher. The fact remains however, that there could be more tax efficient ways of providing for a family on death, especially for those pushing the limits of the Lifetime Allowance.”
Death In Service Could Lose You Your Fixed Protection As Well…
Smith continued: “It was no secret that the Government were reducing the Lifetime Allowance from £1.5m to £1.25m in 2014. They even offered individuals the chance to ‘fix’ their Lifetime Allowance at £1.5m, through Fixed Protection 2014 (FP2014), on the proviso that no further ‘benefit accrual’ would take place. That is, they had to cease making pension contributions or join any new pension arrangements after 5th April 2014; otherwise their Fixed Protection would be lost. Sounds easy enough...
“Well, what many fail to realise is that joining a death in service scheme after 5th April 2014 causes a loss of FP2014. Considering the fact that many people are simply unaware that they even have death in service benefits, a simple act of changing jobs for example, could result in a loss of their protection and a tax charge of up to £137,500 for their beneficiaries.”*
Re-broking Death in Service Schemes: a potential poisoned chalice?
Smith says: “Another potential issue is again out of the individual’s control. Over the course of time, the cost of death in service schemes can increase and it’s often good practice for a broker to find alternative cover from another insurance provider if savings can be made. For ease of administration, it is common for the broker to simply set-up the policy using a new Trust obtained from the new insurance provider, adhering to the needs of the employer but failing to take into account the needs of the individual members.
“As a new trust has been used however, it will be classed as a new scheme and FP2014 will be lost.
“If the broker had simply set up the new policy under the old Trust (which many providers are willing to do), it will simply be classed as a continuation of the old scheme and have no bearing on an individual’s protection.”
Smith concluded: “The message is clear, individuals with large pension funds, high salaries and / or Fixed Protection 2014 need to be aware of the potential issues surrounding death in service. The potential tax charge of 55% on lump sum death benefits, not to mention immediate HMRC fines of £300 for failing to notify them of the loss of FP2014, are too significant to ignore and anyone concerned about their own circumstances should consider seeking financial advice.”
*On losing FP2014, an individual's Lifetime Allowance will fall from £1.5million to £1.25million. The Lifetime Allowance tax charge is 55%, therefore; £1.5million - £1.25million = £250,000 x 55% = £137,500
The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This press release does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.
Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.
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About Tilney Bestinvest
Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. We look after more than £9 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.
We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.
We have won numerous awards including UK Wealth Manager of the Year, Low-cost SIPP Provider of the Year and Self-select ISA Provider of the Year 2013, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.
Headquartered in Mayfair, London, Tilney Bestinvest employs almost 400 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.
The Tilney Bestinvest Group of Companies comprises the firms Bestinvest (Brokers) Ltd (Reg. No. 2830297), Tilney Investment Management (Reg. No. 02010520), Bestinvest (Consultants) Ltd (Reg. No. 1550116) and HW Financial Services Ltd (Reg. No. 02030706) all of which are authorised and regulated by the Financial Conduct Authority. Registered office: 6 Chesterfield Gardens, Mayfair, W1J 5BQ.
For further information, please visit: www.tilneybestinvest.co.uk
Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years. Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.
We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the YourMoney.com Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.
Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.