Planning for death should be part of every review meeting
14 August 2017
Mike Morrison, head of Platform Technical, AJ Bell, looks at ONS figures and how they may affect pre- and a post- age 75 financial plans
In theory, pensions are to provide you with an income for the rest of your life. In practice, many people look forward and plan to leave as much as they can to their families after death. Death benefit planning under personal pensions is a hot topic and the increased flexibility is often seen as one of the reasons for transferring from a defined benefit (DB) scheme.
In many situations it is easy to see the advantages. A DB scheme will usually provide benefits to someone who can be defined as a ‘dependant’ and in the scheme rules this definition is usually close to the following:
• A spouse / civil partner
• A child under 23
• An older child who is dependant due to physical or mental impairment
• Someone who is financially dependent on member
• People in a financial relationship of mutual dependence
This definition has altered over the years to reflect changing society but it is still not as broad as it is for defined contribution (DC) schemes post-pension freedoms, where there is the ability to nominate and pay to (pretty much) any beneficiary. This is very much reflective of a society where people are living longer, perhaps never marrying or marrying a number of times with children still reliant who are over 23 (often from different relationships).
The personal pension death benefit rules since the pension freedoms have been very tax efficient and this is one of the areas on which we get most questions – particularly about whether they will be revised.
As we know, these rules revolve around age 75, with death before age 75 resulting in tax-free benefits and death after 75 attracting tax and arguably requiring more planning to efficiently distribute.
This seems logical – most people are expected to live past the age of 75 and arguably should be taxed on the benefits they pass on, while those who die before 75 should suffer lower tax (currently none).
It was therefore interesting to see the ONS statistics suggesting that, last year, there was a fall in the number of deaths for those aged over 75 but a rise in deaths for those aged between 65 and 74.
The ONS report suggested a 2.2% decrease in the number of deaths at ages 75 and over, (breaking the numbers down, it appears that there were just over 525,000 deaths registered in England and Wales in 2016 – a decrease of 0.9% compared to 2015. It was also suggested that the number of fatalities in Scotland and Northern Ireland decreased by 1.5%).
The mantra has long been that we are in a time of increasing longevity with many actuaries suggesting that statistics showing anything different are just a temporary blip and that we should see the upward trend continue.
The key point however, is that financial planning must be prepared for any eventuality and therefore making sure that both pre- and a post-75 plans are in place is very important.
For example, leaving a benefit to a higher rate tax payer anticipating death prior to age 75 could be good planning, however, accidentally leaving it to that same higher rate tax payer on death after age 75 by forgetting to change the documentation could be a very expensive mistake.
Planning for death might not be the easiest subject to raise at an early meeting with a client but the benefits of doing so could be key. Many advisers that I deal with have now built this into the annual review meeting with an agenda point to make sure that the right people are nominated and that the documentation is kept up-to-date.
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