DLA Piper partner Jeremy Harris explains what this means for trustees

WHAT HAPPENED?

The Chancellor announced on 29 September that the 55% tax for lump sum death benefits from defined contribution arrangements is to be abolished.

WHAT DOES THIS MEAN FOR TRUSTEES?

Currently, where a member dies under the age 75 and the DC pension has not been touched (is “uncrystallised”: is not in drawdown and no tax free cash sum has been drawn), a lump sum death benefit can be paid tax free subject to the lifetime allowance (currently £1.25m).  However, trustees are liable to a special tax charge of 55% on any lump sum death benefits paid:

·                     on death in drawdown; or

·                     where the member dies on or after age 75 and a DC fund is uncrystallised or a DB lump sum death benefit is paid; or

·                     where on death the member is being paid a lifetime annuity or scheme pension and a guaranteed amount of pension is paid as a lump sum death benefit.

A lower rate of tax than 55% may be paid if, instead of paying a lump sum death benefit, a dependant’s pension is paid to a spouse/civil partner or child under age 23.  The recipient is subject only to their marginal rate of income tax on such a pension.

Under the Chancellor’s announcement a lump sum death benefit may be paid tax free from a DC arrangement on the death of a member under the age 75 even if on death the DC pension is in drawdown.  Further, the death of a member with a DC arrangement aged over 75 will no longer trigger a 55% special tax charge, but the recipient beneficiary will be able, at any age and in any amounts, to draw down on that lump sum subject to paying only their marginal rate of income tax.  Such a beneficiary may be any person within the lump sum death benefit class under the scheme rules, not limited to a spouse/civil partner or child under age 23.  These changes will apply to benefit payments made on or after 6 April 2015.

Beneficiaries on the death over age 75 of a member with a DC arrangement will have the option, in the alternative, of receiving a lump sum death benefit subject to a fixed tax charge of 45%.  Even in this case, the Government intends to make such a lump sum death benefit subject to income tax at the recipient’s marginal rate from 2016-17. 

WHAT NEXT?

These changes do not apply to DB lump sum death benefits or to members who on death are being paid a lifetime annuity or scheme pension, where a guaranteed amount of pension is paid as a lump sum death benefit.  Members with DB benefits might seek to transfer their DB rights to a DC arrangement in order to access the new flexibility.

Members may be more inclined to go into drawdown or leave their funds within their DC arrangements without fear of the 55% special death tax.