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Call for death benefits to be made easier to understand

1 November 2017

AJ Bell is calling for a change in the death benefit rules, as its latest research reveals the majority of UK adults with personal pensions are confused about what happens in the event of their death.  

The findings revealed only 7% of those with a personal pension could correctly identify how their pension funds will be treated on their death and just 4% were able to correctly state how much they would be taxed.

The research asked 985 adults if they know what will happen to their pension fund upon their death. Over half assumed it would automatically go to the person they have nominated as the beneficiary of their pension, while 14% thought it would form part of their estate and be distributed as per their will and a quarter admitted they did not know. Only 7% correctly answered that their pension provider will decide who it goes to, taking into account their nominated beneficiaries.

Even fewer people correctly understood the tax implications, with only 4% able to identify that it would be tax free if they die before age 75 and subject to income tax of the beneficiary if they die post 75. Over half admitted that they had no idea, with 11% believing it would be tax free.

Andy Bell, chief executive at AJ Bell said: “The way pension death benefits are taxed is one of the most generous outcomes of the pension freedoms but this is lost on the vast majority of people.  Most of them also assume the funds will automatically go to their nominated beneficiary, without realising that their pension provider currently has discretion to alter that.  In the new era of pension freedoms this control should remain with the pension holder, not the pension provider.”

AJ Bell is calling on the Treasury to provide a blanket inheritance tax exemption on pension death benefits regardless of who they are paid to. The pension provider says this would enable pension provider discretion to be removed from pension death benefits and bring a degree of simplication to an area that is already proving complex for consumers.

Bell said: “A relatively straightforward change to the rules could greatly simplify this area of the pension system without being a huge cost to the Government.  It is clear that the current rules are designed so that pensions are not liable to inheritance tax in the vast majority of cases and so formalising that outcome in all cases is not a difficult step for the Government to take.  It is an oddity that the provider having discretion over the payments is a condition of this tax treatment and feels out of place in today’s world of pension freedom and choice.

“Removing provider discretion over pension death benefits and ensuring they all remain free of inheritance tax would give pension savers greater control over who receives their hard earned pension savings when they die and would make the rules significantly easier for people to understand and hence place a value on.”

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