Minimise tax liability for beneficiaries on your death
Death benefits paid from pensions are taxable if the client dies after the age of 75. Because The Retirement Account is held in a tax-advantaged wrapper, beneficiaries can shelter their money safely inside the account until it suits them.
Rather than taking death benefits as one lump sum, they can phase withdrawals over time to avoid exceeding thresholds such as the higher rate tax (HRT) band.
a. Taking death benefits as a lump sum could easily take beneficiaries into the Higher Rate Tax band, resulting in a big tax bill.
b. By withdrawing death benefits in several instalments, each in a new tax year, beneficiaries can avoid breaching the HRT threshold, saving a fortune in tax.
Beneficiaries can open their own Retirement Account, giving them full access to the flexibility of a Guaranteed Annuity combined with Pension Drawdown, without any money having to leave the tax-advantaged wrapper.
They can select their own blend of Annuity and Drawdown, to suit their needs. This makes The Retirement Account an ideal vehicle for inter-generational tax planning.
Mark, aged 75, uses £100,000 to buy a Guaranteed Annuity via The Retirement Account. This pays him an income of £4,564 per year. He selects a 100% Money-Back Guarantee so whatever happens his pension pot will be repaid in full.
Mark nominates his wife Jean as his beneficiary. Jean currently has a basic state pension and income from a part-time job, totalling £26,000. Unfortunately, Mark dies a year later, aged 76, and the Money-Back Guarantee pays out £95,436 (£4,564 has already been paid as income).
What would happen with a traditional annuity?
The £95,436 would be paid out as a lump sum, and taxed at Jean’s “marginal rate” of income tax.
Jean’s existing income of £26,000 would be taken into account along with the £95,436, so Jean would pay higher rate tax on most of it. In fact, 41% is the effective tax rate paid on the lump sum.
How is The Retirement Account better?
The flexible nature of The Retirement Account means that Jean could withdraw the money in instalments over a number of tax years.
Jean withdraws elements of the lump sum gradually in order to minimise the income tax she pays. She stops working in early April 2017, meaning that she can withdraw a larger portion of the lump sum and still keep her within the basic rate tax band.
This chart is for illustrative purposes only.
* Source: Retirement Advantage, 30.11.2016. ** This column ignores any investment return.
Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. The value of investments may go down as well as up. Taking income or withdrawals in excess of fund growth may result in the fund running out quicker than expected. Inflation will reduce how much the fund is worth in real terms and inflation will reduce how much your income is worth over the years. It is essential to seek advice from a suitably qualified adviser. All figures assume Basic State Pension of £6,206 is payable and are based on 2016/17 tax limits.