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Protecting your estate from a 55% tax charge on death

By October 19, 2015February 12th, 2019No Comments

You may not know that the reduction in the Pension Lifetime Allowance down to £1M from April 2016 could result in more high earners, or those with large accumulated pension funds, facing adverse tax penalties on their death.

As the Lifetime Allowance (LTA) continues to be reduced by successive governments more individuals are being caught by a death tax on assets above the Lifetime Allowance, specifically those who die early where their estates receive a ‘death in service’ benefit paid by their employer. Most employer DIS schemes are “registered” schemes and when the benefit is paid to an individual’s estate it forms part of their total pension assets.

A typical ‘death in service’ would normally pay benefits which are worth four times an individual’s salary. However many high earners and company Directors have DIS that are worth up to ten times their salary.

Take for instance a Director with a £500K pension fund, earning £100K a year. If their DIS is worth six times their salary, on death, their DIS scheme would pay out £600K to their estate, amounting to an accumulated pension asset of £1,100,000. The reduced lifetime allowance from April would mean their estate would potentially incur a punitive tax charge of £55,000.

There are a number of solutions which may help mitigate the tax your loved ones may have to pay on your death.  If you think you might be affected by this reduction in the pension lifetime allowance, please contact us so we can assist you and potentially your employer to mitigate the effect of this death duty.