Defined contribution private pension and IHT liability

[gra001]

Guys, about three years ago I was advised to move my defined contribution pension to Royal London by my then financial advisor, out relationship has since ended. I was always under the impression that when I died the benefits would be paid to my three children in equal percentages without any Inheritance Tax implications but, depending on my age, possible income tax liability. I have recently been advised directly by Royal London that this is not the case as Option 2 "Direction" was originally opted for and not "Discretion" Option 1 which means no Inheritance Tax liability. It seems I am able to change to Option 1 (I'm waiting for the paperwork with explanation) but why would anybody select Option 2 leading to an IHT liability for the kids?....Thanks

Edited by gra001 on Saturday 5th October 12:58

Edited by gra001 on Saturday 5th October 12:59

[JulianPH]

gra001 said:

Guys, about three years ago I was advised to move my defined contribution pension to Royal London by my then financial advisor, out relationship has since ended. I was always under the impression that when I died the benefits would be paid to my three children in equal percentages without any Inheritance Tax implications but, depending on my age, possible income tax liability. I have recently been advised directly by Royal London that this is not the case as Option 2 "Direction" was originally opted for and not "Discretion" Option 1 which means no Inheritance Tax liability. It seems I am able to change to Option 1 (I'm waiting for the paperwork with explanation) but why would anybody select Option 2 leading to an IHT liability for the kids?....Thanks

Someone at Royal London either doesn't know what they are talking about or are very confused.

All DC pensions are IHT exempt by law. It is not possible for a provider to give you an option that leaves it subject to IHT.

It is not automatic who gets the benefits though. If you want the lot to go to your 3 children in equal thirds then you need to complete an Expression of Wish form stating this (and not have anything to the contrary in your will).

[gra001]

JulianPH said:

Someone at Royal London either doesn't know what they are talking about or are very confused.

All DC pensions are IHT exempt by law. It is not possible for a provider to give you an option that leaves it subject to IHT.

It is not automatic who gets the benefits though. If you want the lot to go to your 3 children in equal thirds then you need to complete an Expression of Wish form stating this (and not have anything to the contrary in your will).

Thanks, your view has been confirmed by others in the finance industry but there is evidence this is not the case if death benefits are paid to beneficiaries at the "direction" of the policy holder rather than at the administrators "discretion". Again, this has been confirmed in writing by Royal London and also below, copied from Gov.UK website. I have also received the form from RL to change from direction to discretion and it states under Option 2 direction "if you choose this option, any benefits we pay may be subject to inheritance tax".

Inheritance Tax
You do not usually pay Inheritance Tax on a lump sum because payment is usually ‘discretionary’ - this means the pension provider can choose whether to pay it to you.

Ask the pension provider if payment of the lump sum was discretionary. If it was not, you may have to pay Inheritance Tax.

Edited by gra001 on Tuesday 8th October 18:19

[JulianPH]

gra001 said:

JulianPH said:

Someone at Royal London either doesn't know what they are talking about or are very confused.

All DC pensions are IHT exempt by law. It is not possible for a provider to give you an option that leaves it subject to IHT.

It is not automatic who gets the benefits though. If you want the lot to go to your 3 children in equal thirds then you need to complete an Expression of Wish form stating this (and not have anything to the contrary in your will).

Thanks, your view has been confirmed by others in the finance industry but there is evidence this is not the case if death benefits are paid to beneficiaries at the administrators "discretion" rather than the "direction" of the policy holder. Again, this has been confirmed in writing by Royal London and also below, copied from Gov.UK website. I have also received the form from RL to change from direction to discretion and it states under Option 2 direction "if you choose this option, any benefits we pay may be subject to inheritance tax".

Inheritance Tax
You do not usually pay Inheritance Tax on a lump sum because payment is usually ‘discretionary’ - this means the pension provider can choose whether to pay it to you.

Ask the pension provider if payment of the lump sum was discretionary. If it was not, you may have to pay Inheritance Tax.

This is an often misunderstood area and what you have been told (and cited) is simply not correct.

A direction is always still discretionary, no direction binds a pension provider to follow it.

The rule changes are relatively recent, so this is probably not a surprise. You may need a more modern pension provider if you are still dealing with matters such as this.

Otherwise, just fill out the form and it appears to be sorted!

[gra001]

JulianPH said:

This is an often misunderstood area and what you have been told (and cited) is simply not correct.

A direction is always still discretionary, no direction binds a pension provider to follow it.

The rule changes are relatively recent, so this is probably not a surprise. You may need a more modern pension provider if you are still dealing with matters such as this.

Otherwise, just fill out the form and it appears to be sorted!

Blimey, "a direction is always still discretionary", seems there are contradictions all over the place. This article June 2018, contributor from Royal London:

https://www.moneymarketing.co.uk/death-benefits-di...