Julia Peake, Technical Manager, Nucleus Financial, and her team answer some of the topical technical questions they have received recently.
Q1: With all the pension rule changes, can clients take Pension Commencement Lump Sum (PCLS) post age 75? If so, how is this calculated now there is no Lifetime Allowance (LTA)?
A1: The issues around age 75 has been a complex part of the legislation introduced by Government last year, which has now been rectified.
Before 6 April 2024 if someone had uncrystallised funds at age 75, these were tested against the LTA (even if benefits did not come into payment). However, some went beyond age 75 with some uncrystallised funds and wanted to take PCLS at a later date, say age 77.
The rules meant that at that later date (e.g. age 77) the age 75 BCEs were effectively disregarded. That meant the client could get 25% of the pot as TFC – assuming it fell within usual limits of remaining LTA etc.
When the Finance Act was enacted post April 6 2024, it did not contain that ‘disregard’ in the legislation. So we needed to include the age 75 BCE within the later calculation.
That meant, even those people with potentially plenty scope, may not get 25% PCLS as the age 75 BCE reduced their available LSA. The route around this was for people to apply for a transitional certificate (TTFAC) which hopefully increased their LSA (back to where it should have been).
Regulations issued on 18 November 2024 effectively reinstated the disregard position, so the age 75 BCEs for most people can be disregarded when calculating the client’s available LSA at a later crystallisation. There are two exceptions to that:
- Where a client has obtained a transitional certificate (TTFAC) between 6 April and 18 November.
- Where the client had taken a lump sum between turning age 75 and 6 April 2024.
For further detail please see Newsletter 165 — December 2024 – GOV.UK
Q2: Can clients with protection on their pension benefits now take benefits unencumbered by restrictions to £375,000?
A2: Following the abolition of the lifetime allowance on 6 April 2024, there were some aspects of the legislation which needed amending.
Until that legislation was corrected, HMRC suggested some members should delay the payment or transfer of their benefits. That affected a range of clients including those who had scheme specific lump sum protection, and those with enhanced or primary protection with lump sum rights in excess of £375,000.
We, along with other pension providers, put a temporary process in place, highlighting this issue and suggesting to those affected who requested benefits that they wait until the legislation was updated. The legislation has now been amended, meaning clients no longer need to consider delaying taking benefits or transferring.
Q3; What is insurable interest and why is it important?
A3: Under the Life Assurance Act 1774, insurable interest must exist, or an insurance policy is void. This piece of legislation is relevant to UK based polices, so for those looking at offshore policies insurable interest is not a factor to consider.
Insurable interest exists where the death of the person insured causes financial detriment or loss to the investor/contributor. There is insurable interest on your own life because you’re taking out insurance to reduce or eliminate the financial impact of your death on your family.
For further detail on this please see GIM1050 – Legal basis of insurance: insurable interest – HMRC internal manual – GOV.UK (www.gov.uk) and IHTM20085 – Life Policies: definitions: ‘insurable interest’ – HMRC internal manual – GOV.UK (www.gov.uk).
When considering the levels and basis of life insurance contracts, consideration needs to be given to the assured needs, objectives, and affordability of the premiums throughout their life.
If this is to cover a potential IHT bill, a whole of life policy may be suitable, with a sum assured matching the actual tax liability, based on 40% of the exposed amount. If this is to cover any gifts made, it might be more appropriate/cheaper to look at term assurance/gift inter vivos policy.
Q4: What are the IHT implications when the settlor of a loan trust holding an investment bond with an outstanding loan dies?
A4: The value of the outstanding loan will be inside the estate for IHT, though may benefit from the spousal exemption depending on the circumstances.
The legal personal representatives (LPRs) will need to check the loan agreement and the Will as the LPRs do not have the rights to waive the loan to someone else unless there is instruction in the Will to do so.
If the Will states that 100% of the estate goes to the surviving spouse then a letter of assent of property that moves the outstanding loan to the surviving spouse, making use of the spousal exemption could be used, but legal advice would be required.
If the loan is waived to the surviving spouse, they should seek legal advice about putting provisions in their Will about how any outstanding loan should be dealt with on their death. They have a few options as below:
- Repaid by trustees to LPRs- could cause a chargeable event gain (CEG) and have tax implications.
- Waived- to trustees making this a gift via the Will. Loan still in estate for IHT but trustees have control of the bond and when any CEG occurs if they don’t need to repay.
- Gift to other via the will but there could be tax implications here as well.
We hope you found this useful.
Please note this information is based on our understanding of current legislation, including (but not limited to) FCA, PRA and HMRC regulation. It does not constitute any form of advice. Nucleus will take no responsibility for any loss which may occur as a result of reliance on this information.
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