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19 Oct 2020
Death in Service benefit and your pension
Would your Death in Service benefit take you over the Lifetime Allowance?
What is the Lifetime Allowance?
There is a Lifetime Allowance (LTA) on how much an individual can withdraw in pension benefits before triggering an additional tax charge, which currently stands at £1,073,100* for the 2020/21 tax year and is set to increase by the consumer price index each year.
Any benefits drawn from a pension arrangement above the LTA will be taxed at 55% if taken as a lump sum, or 25% plus the individual rate of tax if taken as an income.
It can therefore be costly to accumulate pension savings above the LTA, as opposed to redistributing this wealth across other financial products.
What are Death in Service benefits?
For those with death in service cover, death in service benefits are the funds that your employer pays out in the event of your death while working at the company (even if this does not occur at work or as a result of your work).
How could your Death in Service benefits affect your Lifetime Allowance?
Many remain unaware of how their death in service benefits would be treated, and whether indeed these would be deemed to use some of their LTA in addition to the value of their pension scheme, should they die whilst working for the company offering these benefits.
A large proportion of death in service benefits are established through pension schemes and therefore would count towards the LTA. This is often not considered when individuals review their personal arrangements to consider how close they are to the LTA. Tax charges may therefore apply on the beneficiaries that had not been accounted for.
Who may be affected by this issue?
The reduction in the LTA from its peak of £1.8 million in 2010/11 has made this a problem for a greater number of individuals.
Some companies have made changes to their death in service schemes to ensure that they are excepted group life policies instead and not linked to pension schemes. In these cases, any death in service benefits will not be counted towards your LTA.
However, a large proportion remain as group life policies on a registered pension scheme. This has consequences for individuals for exceeding the LTA that many may be unaware of.
What can be done?
There are various options for arranging your finances more efficiently to avoid unexpected tax bills, but these will depend on your individual circumstances. For more information, speak to your IFA, or one of the planning team at Investec, Leeds.
*This is the standard lifetime allowance for those that have not applied for pension protection.