By Fiona Hanrahan, Senior Intermediary Development and Technical Manager, Royal London
When reading through the Consumer Duty final rules and guidance, it’s apparent how important these standards of consumer protection are when dealing with death benefits and potential beneficiaries.
For example, the cross-cutting rules set out behaviours firms should exhibit when trying to achieve the principle of good outcomes for clients.
The cross-cutting rules
Firms must act in good faith towards retail customers.
Firms must avoid causing foreseeable harm to retail customers.
Firms must enable retail customers to pursue their financial objectives.
Some of the areas where these cross-cutting rules are relevant to death benefits and beneficiaries include:
The taxation of death benefits
There could be instances when a beneficiary pays income tax on lump sums they receive when, if the plan offered beneficiary drawdown, income tax could have been eliminated or reduced. Ensuring the plan offers the death benefit options the beneficiaries need would therefore be an example of avoiding foreseeable harm.
Making sure expression of wish forms are up to date
This will ensure there are no delays to death benefits being paid and the form reflects the client’s up to date wishes or objectives.
It’s also good practice to ensure any adult beneficiaries are named on the form if there’s a surviving dependant to ensure everyone who wants drawdown has this option.
Lifetime allowance and death benefits
If the client’s lifetime allowance has been exceeded and the beneficiary takes an uncrystallised funds lump sum death benefit, the beneficiary will face marginal rate income tax on the amount above the available lifetime allowance. Again, if drawdown were an option, this tax or foreseeable harm could be avoided.
Pension commencement lump sum after age 75
If a client still has an entitlement to PCLS after age 75 it should be pointed out this entitlement will die with them. This is because on death, the full benefit will become subject to marginal rate tax. This entitlement does not pass to the beneficiaries. For inheritance tax reasons, it might still make sense to forgo the PCLS entitlement if the client doesn’t need it, as once it’s withdrawn it will form part of their estate.
Direction vs discretion
If death benefits have been set up using direction, it’s possible at a future time to change this to discretion. For example, if a spouse pre-deceases the client, it might be appropriate to change direction to discretion to avoid inheritance tax.
Trusts set up to receive death benefits
On death after age 75, any payments to trusts set up to receive death benefits will have a tax charge of 45% deducted by the provider before the proceeds are paid to the trust. Although this can be used as a tax credit by the ultimate beneficiary to offset against their tax bill, it’s still good practice to verify if the trust is still required from age 75.
These are some clear examples of the importance of the consumer duty when dealing with death benefits and potential beneficiaries. If you want more information on what the Consumer Duty is, what it means for your firm and the steps you must take to meet its requirements, please visit our Consumer Duty Hub.
The new Consumer Duty: Guidance and Support – Royal London for advisers
