Pensions death benefit taxation and IHT

Hi everyone. Thanks very much for your time. My name's Craig Muir and I'm joined by my colleague Justin Corliss, and we're both part of the technical marketing team at Royal London. Today we're going to look at the options available from pensions when someone dies and how they're taxed. Now we'll do that by firstly looking backwards and considering the impact the removal of the lifetime allowance had on the taxation of death benefits. Then we'll look forwards to inheritance tax, applying to pension death benefits for any deaths after the 6th of April 2027. So, we'll have you as up to date as possible with all things related to pensions when a scheme member dies. But first, some housekeeping. If you're watching this as a live webinar, then you'll be able to raise questions using the chat facility down the right-hand side of your screen and you know, we'll get back to you with the answer as soon as we possibly can.

Alternatively, you can raise your question with your usual Royal London contact if you prefer. If you're watching the recording of this in that the chat facility won't be available and you'll only have the option of raising your questions with your usual Royal London contact. But with regards to your CPD certificate, you'll need to answer some questions after the webinar and that will automatically generate your certificate.

Okay, that's the housekeeping over. So on with the webinar. Now, the taxation of Pension death benefits has always been something we've been asked lots of questions about. Now, and the removal of the lifetime allowance obviously added to this confusion. And then with the introduction of inheritance tax on pensions, I’m guessing we'll be talking about death benefits for a while yet. Anyway, for this to be CPD-able, we need to have some learning objectives and they are: explain how the lump sum allowance and the lump sum and death benefit allowance work, describe what options are available from pensions when someone dies and how they're taxed, and outline how inheritance tax will apply to unused pension plans and death benefits from the 6th of April, 2027.

Okay. I just want to begin with a quick recap of the main details of the change of regime. I, you know, I assume most of you're all over this, so I'll keep it pretty brief, but I just want to ensure we're all on the same page where before we move on to look at the death benefits aspect in more details.

So, from 6th of April 2024, the lifetime allowance was abolished. But you know what? I guess it didn't really disappear completely because for some people, lifetime allowance usage will dictate the starting point for their new allowances. The lifetime allowance was replaced by two new allowances. We've got the lump sum allowance or the LSA, and we've got the lump sum and death benefit allowance, or the L-S-D-B-A as they're often known.

So, these are limits on how much you can take out as a tax-free lump sum during your lifetime, and that your beneficiaries can take as a tax-free lump sum on your death before the age of 75. Now while the lump sum allowance can have relevance at any age, that lump sum and death benefit allowance, it ceases to have relevance once the client reaches age 75, and I think that'll become more apparent as we move through the session. But here's the key to understanding this new regime. It's all around what you can get out of your pension as a tax-free lump sum. So, benefit crystallisation events like going into drawdown, you know, buying an annuity, et cetera. They're not going to use up these new allowances. And since the 6th of April 2024, the lump sum allowance, which includes the tax-free cash element of an uncrystallised funds pension lump sum, and pension commencement lump sum, is limited to £268,275. So that's changed from being a percentage to a number, and to me, I think the language around this £268,275 pounds is very clear.

That's not going to increase anytime soon. In the post budget documentation, it talked about the £268,275, and there were no plans to increase it. So, no increasing by CPI or RPI or anything like that.

So, as I just mentioned, the first thing to get your head around with the new allowances is that there's a cap or a limit on what you can receive tax free. And the second thing to get your head around is that the lump sum allowance uses up that lump sum and death benefit allowance. And I, you know what I think if you say it out loud, it actually makes sense.

Now what we've done here is we've displayed them as sitting one within the other, and I think that's quite a good way of thinking about it or remembering it. The figures on the screen are what someone would have if they haven't taken any benefits yet or if they haven't got any protection. So, these could be higher or lower.

Okay, I just want to briefly touch on the age 75 disregard as we've been asked about it quite a bit recently and it only applies in quite specific circumstances, so it might not be something you're aware of. And broadly speaking, it's to do with a client's available lump sum allowance. So, clients who turned 75 prior to 6th of April 2024, they could have been subject to an age 75 benefit crystallisation event, which would've used up some of their lifetime allowance simply by turning age 75. And if you are now looking at lump sum allowance post age 75, this lifetime allowance usage will reduce the available lump sum allowance, even though no tax-free cash was actually taken, which is, you know, it's kind of unfair.

And HMRC have recognised this, and they have put processes in place. So, for those who didn't take any PCLS between age 75 and the 6th of April 2024, the lifetime allowance used at the age 75 benefit crystallisation event can be ignored. For those clients who did take further PCLS post age 75, but before the 6th of April 2024, they'll need to apply for the transitional taxpayer amount certificate to regain that lump sum allowance.

Okay. I told you it would be a relatively brief recap. So now we'll move on to look specifically at how pension death benefits are taxed, because as you know, that changed from April 2024. Now just a few warnings up front here and we'll shortly cover the fact that unused pensions and death benefits will be in scope of inheritance tax from 6th of April 2027. So that part is going to change from that point. Whether the payment of pension, death benefits to beneficiaries at scheme and administrators’ discretion, or non-discretionary, they're going to be subject to inheritance tax either way. The current IHD exemptions for spouses and civil partners will remain though, but that's not until 2027, and we need to remain mindful of the rules as they currently stand. As you know, some of you'll need to deal with these issues now, not in 2027. Also, there are some important points about the distribution of death benefits, aside from their IHT treatment and I didn't see anything in the IHT consultation response that altered some of these points.

So, a couple of important points to note here. In either instance, it's really important that you keep the expression of wish form or the nomination form up to date. In discretionary schemes, it helps guide the scheme administrators who will generally follow your wishes unless there's a compelling reason not to.

So even with IHT applying to pensions, the point remains that an up-to-date expression of wish is a lot more help to a pension scheme administrator trying to determine who should get the benefits that one, that's 20 years old. But in scheme setup under direction, it's even more important as this will be followed.

So, for example, if it's an ex-spouse that's on there and you may not want them to get that money, if they're listed on a scheme setup under direction, that's who'll get it. So please keep them up to date.

Another point to raise this time for discretionary schemes, is how you complete the expression of wish form.

Now, let's say you have a spouse and two adult non-dependent children. If you want the non-dependent children to be able to get income rather than just lump sums, they need to be listed on the expression of wish form. But you know what? You don't have to stipulate a percentage. For example, I've seen this many times saying, spouse 98%, child A 1%, child B 1%.

Now, some forms may insist you do this, but that's more to do with their systems requiring it. The important thing is that the kids are listed on the expression of wish form, not that there's a percentage next to it. Now if the scheme is set up on direction, though, obviously you do need to provide splits if it's going to different people as the scheme administrators are following exactly that, what you say there.

So again, if you put in spouse 98% child A 1% child B 1%, that's exactly how it'll be paid out. I appreciate that might not be an issue in the future where, you know, pensions are brought into scope of IHT, but you know, 2027 is still some way off and we need to ensure clients are getting good outcomes now.

This is how the taxation of defined contribution death benefit works from 6th of April 2024, now that the lifetime allowance has been abolished. And I've split this down into dying under age 75, or dying on or after age 75, because the tax treatment is different. So here we're looking at defined contribution benefits where the member dies before age 75 and the benefits are designated, it's the technical term for it, within two years of death or after two years.

So just to clarify, when someone dies before age 75, when the provider's informed of that death, a clock starts ticking. And if two years lapses between when the provider's informed of the death until it's established, what's happening to those benefits, then they're taxed differently. But what I want to do is I just want to focus on the left-hand side because those are the parts that have changed and also, they're far more common as well.

So, starting with the top left-hand quadrant, they are uncrystallised benefits on death when it's established within two years. What's happening to those benefits? The beneficiary's marginal rate of income tax will apply to the portion of the lump sum that exceeds the deceased lump sum and death benefit allowance.

You might get sick of me saying this as I'll probably say it a few times from now on, but if drawdown is used, instead of taking a lump sum, you wouldn't have that tax charge as it would all be considered beneficiary drawdown income, and there's no income tax payable on beneficiary drawdown where the member dies under the age of 75.

This just highlights the importance of correctly completing the expression of wish form in the nomination of beneficiary form. And just as importantly, keeping it up to date. You need to ensure the beneficiaries can have the option of beneficiary drawdown, not just lump sums. And it's worth clarifying what exactly is a lump sum for the purpose of testing against a lump sum and death benefit allowance.

When someone dies, if that provider pays out the benefits in their entirety to a beneficiary as a lump sum that is tested against a lump sum and death benefit allowance if instead the beneficiary goes into beneficiary drawdown. And just remember a plan is set up in their own name and they take anything from that.

For example, they might take all of it on day two, that can never be a lump sum, and as it's death before age 75, we're talking about, the plan would be set up with a nil tax marker and would never face any income tax during the life of that beneficiary, regardless of how and when they take it. It is not just pension funds we're concerned about here.

There might be a death in service, which can only be paid as a lump sum, remember? So, if it's written under the pension rules, not accepted group life or relevant life, then this will use up the lump sum and death benefit allowance. So, you know, even if a fund is less than the lump sum death benefit allowance, remember, beneficiary drawn out might still be relevant when you add on that death in service benefit.

Right now, moving to the bottom left-hand quadrant and we're talking about dying and drawdown before age 75. Now, when we had the lifetime allowance, dying and drawdown before age 75 wouldn't have led to a tax charge regardless of how the beneficiary took the benefits. Now if the beneficiary takes a lump sum, this will be tested against the remaining lump sum and death benefit allowance.

And remember, this will be less than £1,073,100, as a person will have likely taken at least some tax-free cash. Only benefits that went into drawdown after 6th of April 24 are tested against the lump sum and death benefit allowance. Now, benefits in drawdown before this date aren't, and the logic there is that they'll have been tested against the lifetime allowance, so it'd be unfair to test them against the lump sum and death benefit allowance.

A couple of really important points to highlight here are that, you know, firstly, if in that instance that beneficiary chose instead and in fact was able to take beneficiary drawdown, then they wouldn't face any income tax on any drawdown income or indeed any lump sums that they take from that drawdown.

Because technically speaking, as we've just said, it's not a lump sum if it comes from drawdown, it's just income. And if there's no income tax payable and beneficiary drawdown where the member died under the age of 75. Then it’s going to come out tax free. Now, this is worth remembering if you've got clients in drip feed or phase drawdown, they will potentially have uncrystallised benefits, which we tested against a lump sum death benefit allowance, if taken as a lump sum drawdown, benefits and drawdown before the 6th of April 2024, which won't be.

And draw down benefits after the 6th of April 24, again, which will be, now, if you're producing a valuation for these clients, this is information you might want to include. But you know, I'm not sure how proactive providers are at giving you this information if you don't ask for it. Now, all of this to me, this just helps to illustrate the value of advice, as well as an important aspect of the consumer duty.

Your clients, advised clients, are far less likely to see many of these risks materialise or to make decisions that result in a tax charge that could have been avoided. I think there have been, you know, a number of benefits from consumer duty and firming up this concept of avoiding foreseeable harm is a great example. You know, I think advised clients are in a far better position.

This is just to clarify the situation on death after age 75. Now, the removal of the lifetime allowance hasn't changed what happened on death after age 75 as death after age 75 was never a benefit crystallisation event. So, whether the benefits are crystallised or uncrystallised, take as a lump sum or income, they're all subject to marginal rate tax in their entirety.

Now remember, any tax-free cash entitlements die with the member on death after age 75 as a beneficiary will face marginal rate of tax on the full benefit. So, it was already mentioned that lump sum and death benefit allowance is not relevant after age 75, but you know, the lump sum allowance may be as you may still have further PCLS to take.

And remember the age 75 disregard we talked about is this can mean higher lump sum allowance after age 75. Also remember the BCE at age 75 have gone, which potentially would've highlighted to you the fact that your client had uncrystallised benefits. So, you may potentially find you have more clients with uncrystallised benefits after their 75th birthday.

And it's quite common for people to choose to take any remaining PCLS at age 75 as it isn't tax free on death after age 75. So, you know, please just be mindful there isn't an age 75 BCS test flagging this up anymore. And with the introduction of IHT, there could be IHT first, then income tax on any withdrawal.

So, this might also change the thinking around holding onto PCLS entitlements after age 75. And just one further point I want to clarify and it refers to what we call being in the hot seat. Now, if a scheme member dies under the age of 75, the benefits other than lump sums above the deceased lump sum and death benefit allowance are free of income tax.

But let's say the beneficiary that received these, moved them into beneficiary drawdown, and then they didn't spend them and then died, age 76, then their beneficiaries would face their marginal rate of tax on any benefits they took. So, it, it depends on how old the person was who died immediately before in the chain, not age of the original member who died and left the death benefits.

I said earlier the, you know, the taxation of death benefits can be confusing, but you know, right now especially it's important to make sure you're up to date with any legislative changes, but you will be able to keep up to date using the technical central part of our adviser website and also our business development managers and account managers, they'll obviously, they'll keep you up to date too, and the consequence of not being up to date could mean a beneficiary faces a tax charge, which could have been avoided, which, you know it absolutely doesn't fit with the consumer duty, particularly around avoiding foreseeable harm.

I've said it a few times. Not all schemes offer all options, so don't assume beneficiary drawdown is an option, for example, make sure the scheme offers not only what the member wants and needs, but the beneficiary too. Again, this could mean a tax charge is avoided. I think I've highlighted the importance of making sure any expression of wish forms are kept up to date.

And my final planning point is you know, applying for a transitional tax-free amount certificate, a TTFAC, if needed. Remember, this isn't just useful for lump sum allowance purposes. It can improve tax-free lump sum, available in death before age 75 too. And it's the individual or the personal reps if the person's died, need to apply for the certificate before any relevant benefit crystallisations post 6th of April 2024. Now just remember they're the ones that provide tax free lump sums. Once they've had a relevant benefit crystallisation event after 6th of April 2024, that opportunity to apply for their certificate has passed.

So, with my consumer duty hat on again, identifying these clients who could be impacted is crucial to avoid foreseeable harm. Okay, I'm now going to pass you on to Justin who will take you through the rest of the webinar. Justin, over to you.

Thanks Craig. Morning, everybody. Okay. Hopefully that's given you a clearer picture now of how pension death benefits work under the lump sum allowance and the lump sum and death benefit allowance regime.

Now though, what we're we want to look at is what we know to date about inheritance tax, IHT, applying to pensions. So, we know from the budget in October 2024, first of all, announced that inheritance tax would apply to pensions from the 6th of April 2027. So, I guess the first point to be mindful of there is that it doesn't take effect for a little while yet.

But of course, it does have the potential to impact many of your clients' financial plans and of course might and likely will involve changes to the strategies that you are employing for them. So, on the 21st of July this year, 2025 we received the response to the consultation on inheritance tax, applying to unused pension funds and pension death benefits.

We also got the draft legislation came out as well, so we know that inheritance tax will apply and of course the beneficiaries may then, as Craig mentioned earlier on, I think may still have income tax to pay on this on the benefits that they receive after the inheritance taxes being paid. Now, that will depend of course on whether the member had reached age 75 or not before they died.

The process, we'll see the personal representatives responsible for paying the inheritance tax due. Now, anyone who read the original consultation will know that's a change from the original consultation. That was a pension scheme administrators led process for the IHT due on the pension element. But now it's going to be the personal representatives that are responsible for that, although there will be instances where the pension beneficiaries are also jointly and severally liable.

And we'll look at that a little bit more as we as we move through. So, inheritance tax is going to apply to most types of pension plans, as you can see on the right-hand side. There towards the bottom. There's very little that's out of scope. Charity, lump sum, death benefits, we know we're out of scope.

Dependent scheme pensions are out of scope for this proposal. Death in service and joint life annuity survivor benefits we're going to talk about as we move through a little bit more. But you know, most other pension benefits are in scope. So just while we're on the point of what's in and out of scope, I do just want to point out that inheritance tax exemption for transfers of assets between spouses and civil partners will still apply, and that's obviously going to be one that is, is a heavily used exemption as it is today.

So, let's have a look at all of this in a little bit more detail. So, the consultation response. And for anyone that has read it well, you'll know that it sets out a five-stage process for dealing with inheritance tax on pension benefits the first stage which I cunningly call stage one. The information is exchanged to establish the value of any pension benefits to be included in the estate, so the personal representatives will.

As they do at the moment, identify the pension schemes of which the deceased was a member and contact the relevant pension scheme administrator or administrators if there was more than one scheme to inform them of the member's death. The pension scheme administrators then must tell the personal representatives the value of the pension for IHT purposes within four weeks of receiving the member's or the notification of the member's death. Be interesting to see how that one pans out. That's, you know, probably a little bit more straightforward for an insured plan where you start to get a liquid assets within SIPS and SaaS and stuff like that. I presume that's going to be challenging, but we will wait and see how that unfolds.

Stage two is where the personal representatives value the estate. So, they'll collect the information from each of the pension scheme administrators, and of course, the other components of the estate to reach a total valuation of the estate and determine whether inheritance tax- well, whether an inheritance tax account should be returned to HMRC really is the first step.

In stage three, if the personal representatives file the inheritance tax account if necessary and pay the inheritance tax if needed. So, if inheritance tax is due, the personal representatives will establish how much inheritance tax is attributable to the different components of the estate and then submit an account to HMRC.

The personal representatives will then inform the pension beneficiaries once they've been appointed. So, once we know who they are and the pension scheme administrators of the amount of inheritance tax due on the pension component of the estate. Okay? There are then several ways that the IHT on the pension component of the estate can be paid.

We're going to cover that off in over the next couple of slides. Looking then at stage four, so this is pretty relevant to pension scheme administrators and beneficiaries. It's around the distribution of pension benefits. So, once they have been notified of a death, the pension scheme administrators and the trustees will start the process of identifying beneficiaries and paying out the benefits.

Now for non-exempt beneficiaries. So those that don't have maybe the spousal civil partner exemption, for example. So, for non-exempt beneficiaries, the pension scheme administrators will explain that inheritance tax may be due on the pension benefits and that the beneficiaries are now jointly and severally liable along with the personal representatives for any inheritance tax that is due on that pension component.

And then stage five is largely what we know of the process already. Personal representatives will be responsible for managing any amendments to the estate and submitting any amended inheritance tax accounts to HMRC. Now, HMRC does acknowledge that there will be, you know, some overlap in the stages.

For example, stage four is likely to overlap with stages one, two, and three because you don't have to wait for probate to pay out pension benefits. You do have to wait for the beneficiaries to be identified. Of course. And they also acknowledge that, you know, that fairly basic five stage process doesn't necessarily capture every scenario.

And they will work with the industry, they say, to develop and refine the processes ahead of April 2027. Okay. Now, HMRC are pretty quick to point out in the consultation response that for most non IHT paying pensions, the process will be no different at all After the personal representatives have confirmed that no inheritance tax is due on the estate.

The pension scheme administrators will be able to proceed as normal to pay out the benefits as soon as the trustees have completed that discretionary process and identified who the beneficiaries are going to be. When there is inheritance tax due on pension assets though, there are three options available to the personal representatives and pension beneficiaries to pay the inheritance tax due on unused pension funds and death benefits.

And you can see those there on the screen at the moment. They can either pay directly from the free estate. Or the pension beneficiaries can direct the pension scheme administrators to pay HMRC on their behalf or the pension beneficiaries can take their pension benefits in full and then they can pay the inheritance tax due on the pension element directly to HMRC.

Okay. So, what I think Okay, is, it's probably just worth drilling down a little bit further into this, is I think it's going to be of fairly significant interest to those impacted by the inheritance tax charge on pension. So, if we look, then go on and look directly at the scenario where it's being paid directly from the free estate.

Okay. So, the personal representatives can pay the inheritance tax due on the entire estate, okay, including the pension component directly from funds in the free estate. And then proceed to apply for probate now if the beneficiaries of the free estate. So, we're talking now about everything outside of the pension element.

So, if the beneficiaries of the free estate and the pension beneficiaries are the same, then they can take their pension benefits in full. It's fine. You know, they're the same people and the IHT is all been paid and there isn't a liability for any further. If the free estate beneficiaries and the pension beneficiaries are not the same, the personal representatives can use their existing legal right of reimbursement from pension beneficiaries to reclaim the value of the inheritance tax paid on the pension and distribute this to the beneficiaries of the free estate. Okay? Now, if the pension beneficiaries take their benefits in full, they'll be able and then had to pay that the IHT or repay the IHT, they'll be able to claim a repayment from HMRC of any income tax paid on the amount of inheritance tax charge on their benefits.

So, that's going to be I suspect a little, a few nuances to unpick from all of that. because there's a few ways that could happen. I think we, we will get further information on that, but that gives us a reasonable grounding of how that part works at the moment. So, if we just put that into practise a wee bit.

Okay. Let's imagine here that we have an estate with a total value of 2 million pounds. Okay? The pension assets comprise 1 million of this, and the member dies age 77 with no children. So that tells us a couple of things. Firstly, that the pension benefits will be subject to income tax at the beneficiary's marginal rate. Member died over the age of 75. And second is that there will be no residence nil rate band applicable here as any property included in the estate isn't going to direct descendants. Okay. Now, in this instance, the free estate beneficiaries and the pension beneficiary are different people. We'll just say there's only one pension beneficiary, just to make it a little bit easier.

Okay, so the entire estate's valued at 2 million pounds and we deduct the nil rate band leaving a hundred and 1,675,000 pounds subject to inheritance tax. 40% inheritance tax on this is 670,000 pounds as you can see on the next line, which the free estate pays in full. The personal representatives can then reclaim the inheritance tax charge, applicable on the pension, 335,000 from the pension beneficiary.

So, the pension beneficiary receives 399,000. As you can see, right the bottom, this is 1 million pounds, less the inheritance tax charge of 335,000, less the higher rate tax charge on the residual, 266,000, leaving 399,000. Now, you might be wondering why I've assumed higher rate tax here rather than additional rate tax.

Well, what I'm assuming is the beneficiary’s receiving financial advice and managing their income, so, they take it over several years within the higher rate tax threshold. They're not going into additional rate, you know, if they didn't and took the pension benefits as a lump sum for argument's sake, then they'd be faced with an additional rate of tax and some or possibly all of the inherited pension would be taxed at 45%.

And do you know what, I just think that highlights the importance of involving beneficiaries early in your client's inheritance tax planning. Not only will your client have peace of mind that you're able to mitigate some of the inheritance tax for their beneficiary, the beneficiary will also receive a better outcome.

And you may also benefit by picking up that beneficiary as a new client with, you know, all the issues that we've heard over the years about people who inherit money, not necessarily staying with the same adviser. And of course we're always trying to overcome that, aren't we? Remember the beneficiary would be able to claim back any inheritance tax that they paid on pension benefits that they withdrew to reimburse the free estate beneficiaries for the inheritance tax charge. And I've already factored that in, so I've assumed that if they did have to draw out a lump sum and pay additional rate tax, then they can take claim back the additional rate tax part of it anyway.

So, I've just netted it all out in the calculation there. What have we got for our next option here, alternatively, of course, yes, the personal representatives can pay the inheritance tax due on the free estate and then work with the pension beneficiaries once they've been appointed to pay the inheritance tax due on the pension component.

Now, if the beneficiary directs the pension scheme administrators to pay, then they will receive the remaining benefits subject to income tax. If appropriate, you know, once again if the member died over 75 or didn't. Now just a couple points around that. Firstly, the beneficiaries can only instruct pension scheme administrators to pay the inheritance tax charge relating to the pension element.

It isn't possible to pay the inheritance tax charge on the non-pension element, the free estate from the pension scheme. And that might be a little bit disappointing given the last point on the slide there. In the estates where the member died over the age of 75, or in fact 75 or over income tax will be due at the beneficiary's marginal rate, on the residual pension benefit after inheritance taxes paid.

And you know what I suspect given the chance, particularly where the beneficiaries of the pension benefits and the wider estate are the same people, and the member dies over the age of 75, that the preference would be to pay all of the IHT bill from the pension funds, which are going to be subject to income tax rather than funds or assets that aren't.

Unfortunately, that's not possible. Now, just on that top point, on the slide there, the draft legislation will include changes and does in fact include changes to make this an authorised payment. Okay, so if anyone thinking, well, hang on, you can't do that at the moment, you couldn't pay it off to HMRC.

Well, it is going to be possible. So, second point there the pension scheme administrator must pay the inheritance tax due if the amount is, not more than the remaining death benefits due to the beneficiary under the scheme. And the amount in respect of those benefits is 4,000 pounds or more.

So basically, they put a de minimus on it. In much the same way that you sort of think about it for scheme pays, charges, you know, you've got to have paid more than 40,000 pounds in, and the scheme pays charge needs to be 2,000. Similarly, here the charge to YHD has to be 4,000 pounds or more.

Now if that is the case, then the pension scheme administrators must pay the inheritance tax within three weeks of receiving the beneficiary's payment request. However, if the amount is less than 4,000 pounds, you know, the scheme administrator retains discretion over whether or not, they will be liable for paying that.

I suspect some will and some won't. Okay. And let's look at the numbers for this one as well, actually. Now, this time, let's suppose that we have an estate with a total value of 4 million pounds. The pension assets comprise 2 million of this, and the member dies, aged 81 with no children. So once again, we know those same two things, okay: that there'll be beneficiary will face income tax at their marginal rate because of the age of the member when they died, and that there'll be no residence nil rate band as it's not being left to a direct descendant. So once again, the free estate beneficiaries and the pension beneficiaries are different people, or otherwise, it makes it a little bit too easy to work through. So, we know that the entire estate is valued at 4 million pounds, and we deduct a nil rate band leaving 3,675,000 subject to inheritance tax. 40% of that is 1,470,000, half of which is attributable to the pension assets. This time, the pension beneficiary instructs the pension scheme administrators to pay half that 1.4, 7,735,000 directly to HMRC on their behalf before they ever receive the pension benefits. So, the pension beneficiary receives in this instance 2 million pounds, less the 735,000 inheritance tax charge, less the 506,000 that we'll assume is higher rate tax on it. And they end up with 759,000 pounds net of all tax charges there.

The third option, and I see this being pretty popular I think in more complex estates that are perhaps take a little bit longer to be distributed and the pension beneficiaries can take their pension benefits in full in this instance and then pay IHT. Oh well, any that's due to HMRC for the pension element.

And then reclaim, as I've mentioned a couple of times already, reclaim the income tax paid on the benefits that they took that they then use to pay the inheritance tax charge. Now, it's important to note here that it no you don't need to wait, and I've mentioned this already, you don't need to wait for grant of probate for the pension death benefits to be distributed.

And it might be that there's not enough liquidity in the free estate to pay the whole inheritance tax charge. Furthermore, look, it might take the bulk of the six-month IHT payment window to determine the inheritance tax charge payable, and the pension beneficiaries might want not want to wait that long to access their pension benefits.

They might not be able to wait that long to access their pension benefits, particularly if they're different people and that they need money now. Now what the consultation response does make clear is that once the pension scheme beneficiaries are appointed, the pension scheme administrators need to make the non-exempt pension scheme beneficiaries aware that an IHT charge may be payable and that they are jointly and severally liable with the personal representatives for the IHT charge due on the pension element of the estate, and I know I've sort of mentioned that a couple of times, but it's really important because we don't want situations where pension scheme beneficiaries have got their money before probate spent all of the money and gone I didn't realise that I was going to have an IHT charge on this.

Well, the pension scheme administrators need to make them aware and so will the personal reps that they are jointly and severally liable. Okay, so for our final example here, okay, so this time we have an estate with a total value of 1 million pounds all of which is pension assets. Okay? So, there were no other assets in the free estate with this one.

An unusual scenario, I admit, but not impossible. And plus, the beneficiary is in this instance, an additional rate taxpayer. Okay? Now, this time the member dies, age 79. Once again, no children. So, income tax payable, no residence nil rate band applying. So, we know that the entire estate is valued at 1 million pounds, and we deduct the nil rate band leaving 675,000 subject to inheritance tax.

40% IHT on that, or inheritance tax on that is 270,000 pounds, all attributable to the pension assets. The pension beneficiary takes all the pension assets, paying 45% income tax, leaving 550,000 pounds. They then pay the inheritance tax due of 270,000. However, as they've already paid income tax on that money, on those pension benefits that they'll use to pay the inheritance tax charge, okay, which would clearly be double taxation, which is not what not what the policy objective is here, they can claim back the income tax that they paid on the pension benefits, that they used to pay the inheritance tax bill. So basically, they can get back that 45% tax charge on 270,000 pounds, okay, the amount that the IHT charge was, so the net outcome for the pension beneficiary is 1 million pounds pension benefit. Less 450,000 income tax charge. So that's left them with 550,000 net of IHT of 270,000. But then they get back the income tax reclaim on the amount that they used to pay the IHT charge.

So that would be 121,500 back, basically, you know, 45% of 270,000, leaving the beneficiary a net figure of 401,500 pounds. Right. What I just want to jump onto now is raise the point around death in service benefits. Now, this was something that we were really waiting for clarity on in the consultation response is it was a little bit unclear from the original consultation how some death in service benefits would be treated from an IHT perspective, particularly non-discretionary death in service payments, which are currently part of the member's estate. Now fortunately, the consultation response clarified that death in service payments are not in scope of inheritance tax on pensions, whether they be paid from discretionary or a non-discretionary scheme. Now, just a couple of things to say about that. All right. Firstly, for a death in service to be paid the member needs to be actively working for their employer.

You know, the reality is fortunately that most people don't die while in employment. But of course, you know, some people do. And in instances where this is the case, it's good that we have this confirmation. You know, if you have someone, one of your clients for argument's sake, pass away in service that let's say 60 years of age, okay.

Firstly, the pension being subject to inheritance tax is likely to hit them particularly hard. Okay? The pension fund is likely to be at its peak or pretty close to it, and they're unlikely to have accessed it as they're still working. It's not impossible, but it's less likely. Combine that with the fact it's not uncommon these days to see death in service, multiples of salary of six or even eight times salary, sometimes higher than that, in fact. So having death in service benefits included in the IHT-able estate, clearly not a word, but gone with it would've been quite penal for an asset that quite frankly, you didn't have access to during your lifetime. You had no option of gifting away. So fortunately, hey, they're not included. Do you know what, this is actually pretty good news for members of some public sector pension schemes as well, whose death in service lump sums are currently treated as part of their estate. Under these new rules, these will not be in scope of inheritance tax.

So, you know, do remain mindful of this for when you're discussing IHT mitigation strategies, for example, your NHS clinician clients. They're a group that often have an IHT problem. So, while this is all, good news, this side of it, I do just want to balance the point with the fact that most people do not die in service.

But of course, for those that do it is really welcome. There were a couple of other points of clarification in the consultation response to address questions raised in the consultation process. So, I just want to touch on a couple of those. We'll begin here mainly because this is the top of the list with joint life annuities.

Now, during the consultation period, there were queries raised about the treatment of survivor benefits of a joint life annuity where the joint lives weren't spouses or civil partners. So, you know, if the IHT did apply that the exemption wouldn't have applied in those instances. Well, do you know what, the consultation response cleared this up pretty well I thought by confirming that for unmarried couples and children, the rights of the survivor are separate from the rights of the member, the survivor rights paid from a joint life annuity are not part of the members estate and are not in scope of inheritance tax. Now there was also an explanation of the position on trivial commutation of death benefits. So, in instances where the dependence scheme pension benefits were pretty small, they didn't exceed a capitalized value of 30,000 pounds and the provider doesn't, and perhaps the member as well, the beneficiary as well, don't really want to receive, lots of really small, regular payments, and they are commuted to be paid as a lump sum. The lump sum will not be in scope of inheritance tax. Okay. I guess that makes pretty, good sense really.

We knew right from the point the consultation was published that the dependents pension scheme benefits would not be in scope. So, I guess it's no real surprise that they're still not in scope if they're commuted to be paid as a lump sum. The final point there of unauthorised payments, so the consultation response makes it clear that any unauthorised payments out of a deceased member's pension will still be in scope of inheritance tax as well. So, a few important points to be mindful of just there. Right now, that we have the consultation response, we have a lot more clarity around some of the questions that advisers were asking us during the consultation period. Perhaps it's a good opportunity to raise some of these.

We'll start off with things like, you know, what should my clients be doing now? Or even should I be thinking about gifting now? Sort of fit together fairly nicely. Do you know what? There isn't really a universal answer to this. It's going to depend on the client's needs, objectives, and financial position.

Probably a multitude of other factors as well. That said, we know that inheritance tax will be levied on pensions from the 6th of April 2027, and that will mean new or increased IHT liability for a lot of your clients. Now, for those with pension funds likely to be used or rather I suppose those that are unlikely to be used during the member's lifetime, and particularly in instances where pension funding has been a strategy mainly aimed at shielding funds from inheritance tax.

It would probably make sense to begin reviewing existing plans. Now, for those clients in a position to do so, gifting out of normal expenditure from pensions may be a useful strategy, particularly given some of the other benefits that it can bring. For example, gifting pension income out of normal expenditure, and this gift being used to fund a pension contribution for a child or a grandchild can reduce the inheritance tax liability and also potentially reduce the adjusted net income of the person receiving the pension contribution, which gets them a pension contribution, gets them tax relief at their marginal rate and of course could help them out of some of those income tax traps that we're all so aware of, your high income child benefit tax charge and the personal allowance tax charge.

Now obviously there are some fairly key considerations here. You know, gifting out of pension income requires the member to be in receipt of income, pension income, not surprisingly, and that means that the money purchase annual allowance will likely have been invoked. It will also limit therefore the member's ability to make further pension contributions.

So, hey, maybe it's less suitable for anyone still working and perhaps in receipt of an employer pension contribution. There's also the member's income tax bans to consider, drawing funds at higher rate of 40% or higher to avoid a 40% inheritance tax charge. Perhaps less appealing. There's also the point around gifting generally to create a potentially exempt transfer with a view to reducing the IHT liability.

But I don't have time to delve into that today. That's a whole session in itself. Looking there at, will the payment of death benefits be delayed? Hey, look, the most significant change to the consultation response as I've already touched on, is the move from it being a pension scheme administrators led process for the inheritance tax relating to the pension assets to the personal representatives being responsible for the whole lot. Now that move away was a result of the concerns around the delays in the payment of pension death benefits. And do you know what the changes discussed, do appear to lessen the concern, I don't know that they remove it completely. There is still a greater requirement for personal representatives to deal with pension scheme administrators and for the pension scheme administrators to respond to the personal representatives. Not all estates are going to be professionally managed, so there is still potential for increased interaction and for that increased interaction to cause delays.

I've got one up there about what about death in service? I think that one's pretty clear now. No death in service is going to be in scope of inheritance tax regardless of whether it's come from a discretionary or non-discretionary scheme.

We are getting lots of questions around the order of taking benefits and whether that's likely to change. I'd have thought so, yes. Given the perceived wisdom previously was often to take benefits from everything subject to inheritance tax first and then the pension last as they're exempt from inheritance tax, that's not going to be the case. Yes I'd imagine there will be changes, and how pension death benefits paid into trust are going to be impacted.

Actually, still working with some of our technical bods to work out exactly how particularly where the members died over the age of 75 and there would be that 45% tax charge, how that, the actual mechanics for that being recouped. We will look to put that information on our technical central website when we're absolutely certain of it.

So, keep an eye out for that. What I will say, so I don't think, even if there's problems it negates the importance of a trust. Do you know what? From our experience, trusts tend to be more about control than they tend to be around the tax issues anyway. Right. So that's kind of all that we've really got time for today.

I'm going to let you have another look at the at the learning outcomes. Now, as Craig mentioned at the start, if you're watching this as a live webinar and in that case, you'll be able to raise questions in the chat facility down the right-hand side, and we'll get back to you with an answer as soon as we possibly can.

Alternatively, you can raise your question with your usual Royal London contact if you'd prefer. If you are watching a recording of this at a later date, chat facility won't be available to you, your only option will be able to raise the question with your usual Royal London contact, but do speak to them because they are an excellent source of information. With regards to your CPD certificate, now as it says on the screen here, you head to our CPD Hub on the Royal London adviser site. You answer the questions correctly is one of the key requirements, and then your CPD certificate will be automatically generated. If you are looking for any sorts of further support.

Okay. I always suggest that you speak to your usual Royal London contact in the first instance. Hey, they might have just been asked the question by somebody else. Okay. So might know it off the top of their head. Plus, we it's always important to make sure that everyone's kept in the loop, including your business development manager, be it protection or pension. But for other options, for further support, visit our technical central site on the Royal London adviser website, where our technical team are going to have further information available around, well, all of these matters, but particularly IHT on pensions, pretty topical.

And of course, they will include frequently asked questions there as well. If you are looking for further help around protection solutions to mitigate inheritance tax, our corporate and estate planning protection team, the SEPs is the acronym that we always call them, are absolutely happy to assist you with further training and support, including discussions on cases on the protection solutions available. Please use your usual contact details. Either speak to your Royal London contact on the protection side or use the email address that, that we've provided here for it. But yeah, we've got a range of different options and we're really keen and ready and willing to try and help you as much as we can with this, you know, that Royal London is an intermediated only. We look to try and help advisers wherever we possibly can and partner with you as much as we possibly can as well. Right, that's pretty much all we've got time for. I want to say, as it says on the screen, thank you very much for listening and for your time and I look forward to seeing you on a future webinar soon. Thank you very much.