Benjamin Franklin famously proclaimed “In this world nothing can be said to be certain, except death and taxes.” Now perhaps there is a third certainty: continually changing pension legislation! Ironically though, the most recent change to pension legislation may have cast Franklin’s second certainty (taxes) into doubt following his first (death)!

Previous legislation often meant that the death of a member of a pension scheme, who had started taking their benefits, could result in a tax charge of up to 55%! Fairly hefty!

New legislation means that this may not be the case if certain conditions are met. As you might expect with pensions legislation it is not entirely straight forward.  But by way of a fictitious, contrived example I will try to explain a few of  the connotations that your clients may face.

I will stick to the more straight forward ‘money purchase’ pension arrangements, i.e. not Final Salary or Public Sector such as the NHS or Police Service schemes. This is so that I keep it as simple as possible so that I can outline some of the potential issues .

I will also use triplets as the basis of a case study and then systematically kill them off and explain the treatment of their pension funds.

So, without further ado I introduce to you the stars of our story, Alexander, Barbara, and Charles (don’t get too attached to them, I’ve already told you I’m bumping them off!).

Alexander is married to Barbara’s best mate, Anita, they have two children and at the time of Alexander’s sudden and tragic death he was aged 67. He had not crystallised any of his pension benefits. Alexander and Anita had been very switched on and had seen a Financial Planner who had ensured that their Nomination of Beneficiary forms for their pension plans had been updated and reviewed every year. Alexander had nominated Anita to receive his pension benefits and as these had not been touched they were available to Anita in any form she wanted following Alexander’s death.

She could take the pension fund as a lump sum, tax free, if she wanted, or she could draw an income from it, also tax free, for the rest of her life.

Anita went to see her Financial Planner who explained that as their children had also been named on the beneficiary form, they too could benefit from the pension fund, tax free.

Anita was delighted with the work of their Financial Planner.

A few years later Barbara did a skydive for her 70^th birthday. She had seen her Financial Planner who had encouraged Barbara to follow her dreams of travelling and fulfilling her bucket list.

They had worked out that Barbara was likely to be able to do this without the fear of running out of money and so with a big smile on her face she headed off to the Far East and fulfilled her final ambition of jumping out of a perfectly good plane at 15,000 feet.

Despite what you may be thinking the jump went fantastically well, unfortunately back at the hotel, Barbara slipped on a bar of soap and ‘kicked the bucket’!

Barbara was also married, to Bryan, they had no children. Barbara had crystallised her pension benefits to fund her retirement plans. Fortunately her Financial Planner (the real hero of this story!) had again ensured that the nomination of beneficiary form had been kept up to date and reflected her wishes.

This meant Bryan could continue travelling the world whilst drawing a tax free income from the pension (despite Barbara having taken the benefits) with the occasional tax free lump sum (handy when in Vegas) to help along the way.

Bryan was delighted with his Financial Planner.

At Barbara’s funeral Charles, a bit of a character, met Claire.

Claire was a feisty 30 year old and hit off with Charles instantly, within weeks they were married and decided to head to the Maldives on their Honeymoon. They had a lovely time.

For their 5^th anniversary Charles (now 75) decided to surprise Claire, booking a return to the Maldives. For the first 5 days everything was perfect but on the 6^th day Charles unfortunately got a blowfish stuck in his snorkel and shuffled off this mortal coil.

Charles was sold his pension by a Financial Adviser working for a large national organisation called St Steven’s Plaza. They hadn’t reviewed his pension since they transferred it into their own (very expensive) funds shortly after his marriage. At the time they had discussed a spousal bypass trust, as he had only known Claire a month or so he decided that the spousal bypass trust was a good idea and so set one up.

However, being transactionally based there was no incentive for their St Stevens Plaza’s adviser to review Charles’ situation or even keep him informed of the latest changes to pension legislation.

Following his death the pension trustees paid the death benefits into the spousal bypass trust but as Charles had been over the age of 75 at the time, this payment suffered a tax charge of 45% (the Trust rate of tax).

Charles’ pension fund was worth £500,000 at the time of his death.

The tax charge was £225,000.

Claire, a basic rate taxpayer, was not delighted with their Financial Adviser.

Had the spousal bypass trust been reviewed following the latest change in legislation Charles may have decided to complete a new nomination form, effectively rendering the spousal bypass trust null and void.

Had he done so, Claire could have drawn the funds as and when needed at her marginal rate of tax, in this case 20%. Poor Claire!

This case study highlights some of the complexities of the new pension legislation and the one lesson to take away from it (other than don’t trust blowfish) is that given the constantly changing pension landscape you need someone who is on top of these changes and provides regular updates and guidance. A Financial Planner is best placed to provide this ongoing service as they are able to act in the clients best interest, irrespective of whether there is a ‘transaction’ to be made.

Planning that once made sense may leave clients in a situation that they do not want to be in, or leave as a legacy to their loved ones if (or when) the pension goals posts are moved.

Now if Claire had of been a raging alcoholic with a retail therapy problem, Charles may well have thought that the tax charge is a small price to pay to have the benefits of his pension controlled by Trustees rather than going straight to Claire (less some tax at her marginal rate). The point is that Charles should’ve been given the opportunity to make informed decisions about his pension death benefits not long after the legislation changed. This would have been the case if he’d been working with someone who had his best interests at heart.

We continually refine our clients’ financial arrangements to reflect changes in their personal life and the wider regulatory and taxation environment. This is to ensure that what they have is what they need and they can go to their final resting place with another certainty, that their loved ones have been left in the best possible position despite them not being around to see it.