Death Benefits to Dependants & Charity
Recent figures have shown that an increasing number of clients with large pension funds are deciding to keep these funds invested, taking retirement income by drawdown, rather than spending the entire fund on a fixed annuity income.
Drawdown offers the benefit of enabling a larger and more flexible income to be taken. Furthermore, and up to age 75, the entire pension fund can also still pass to any nominated beneficiary less only a 35% tax charge. This is why so many clients with large pension funds are taking advantage of income drawdown when they first take benefits.
The charity nomination
An often overlooked further benefit of the drawdown approach is that from age 75 all of the remaining fund can be passed tax free on death to a charity of the member’s choosing. This is called the ‘charity lump sum death benefit’.
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From age 75 the remaining pension funds can no longer be passed to non-dependants on death. This restriction can lead many clients to decide that once they reach age 75, buying an annuity with the remaining fund may be more advantageous than continuing in drawdown. However, the disadvantage with an annuity remains: the fund has to be spent and if death occurs shortly afterwards the value of the fund has essentially been lost.
By contrast, if a client remains in drawdown post age 75 all of the fund can be used to provide an income for dependants (not non-dependants from age 75), and then tax free to charity.
Why is this of interest to private client practitioners?
Private client practitioners can add great value by pointing out that the pension fund can be left tax free to charity on death, rather than being spent on an annuity. In addition to potentially raising far greater sums for charity, a client may also decide to redraft his/her will to pass assets previously earmarked to charities from their free estate directly to family members.
Therefore, a fund which would otherwise have been spent on an annuity can instead continue in drawdown after age 75, then provide for any dependants on death, and then pass to a charity, thus leaving greater wealth for the client to dispose of as he/she wishes from the free estate.
The questions to ask
Regardless of whether a client has decided to make a charitable bequest in their will, if the private client practitioner discovers that a client has a large pension fund, drawdown and a charity nomination remains an important option to discuss. This is especially the case as the client reaches age 75 or if they are in poor health.
On discussion, the private client practitioner may find that the client with no dependants would far rather have their remaining fund go to a charity than to an annuity provider. This is especially the case if the client is ill and can immediately see the poor value in being forced into an annuity purchase.
It might ease the client’s decision making when they realise that any surplus money in the fund which is not given to financial dependants or charity will be subject to tax at 82%!
In summary, a client will often benefit from remaining in drawdown (and not buying an annuity) if some or all of the following apply to him/her:
- They have a poor life expectancy.
- They wish to give to a charity, after providing for dependants.
- They have younger dependants – the younger the more advantageous to remain in drawdown.
- They do not wish to spend their pension fund, built up over many years, with an annuity provider. This may be because of religious beliefs, or simply because they wish to retain continued control over the investment and destiny of their funds.
As with will writing, pension planning is a complex exercise. Earlier in the life of the client this may have involved placing the pension death benefits ‘in trust’, or simply making an ‘expression of wishes’. Later in a client’s life, and particularly as they approach and pass their retirement date, ensuring all of the options for dependant and charity nomination have been considered will add great value to a client’s estate planning.
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