SSAS and SIPP members should review their expression of wishes

A significant change to the amount of lump sum death benefits that may be paid from a Small Self-Administered Scheme (SSAS) tax efficiently is proposed to come into effect on 6 April 2024.

If you are a member of a SSAS or SIPP, it is important you review your expression of wishes form, or any other document which you have provided to the trustees of your pension fund, setting out to whom you would prefer any benefits to be paid in the event of your death, and in what form. This helps to make your wishes clear. It should assist the trustees to implement the death benefits in line with their discretion.

Background information about death benefits

Death benefits from a SSAS are usually paid at the discretion of the trustees. As such they should fall outside the member’s estate for inheritance tax purposes. Typically, a member will give an expression of wishes to say whom they would prefer to benefit from their pension savings to the trustees of the SSAS, as distinct from documenting this in their will. If the pension scheme is included in the member’s will, this would take away the trustees’ discretion and therefore might bring the SSAS benefits back into the member’s estate.     

The range of death benefits available from a SSAS, provided the scheme rules permit them, is set out in our Taxation of death benefits note. 

Taxation of the benefits depends on the circumstances. One option is for the death benefits to be paid as lump sums to the member’s beneficiaries. 

Currently, the whole of the member’s fund can be paid as lump sum death benefits free of income tax (subject to not exceeding the Lifetime Allowance), if:

• the member was under 75 when they died; and 
• the lump sums are paid within two years of the scheme administrator being notified of the member’s death.

However, with effect from 6 April 2024, it is proposed the amount of lump sum death benefits that can be paid free of income tax under the same two conditions will be restricted. The new limit will be known as the Lump Sum and Death Benefit Allowance (LSDBA), which will initially be set at £1,073,100. There are no provisions for this figure to increase automatically.

A higher limit may still apply to those individuals with forms of protection against the lifetime allowance.

Under the proposals, when determining the amount of lump sum death benefits that can be paid from a member’s SSAS, the member’s share of the SSAS assets will be compared against the LSDBA, less an allowance for any lump sums the member has drawn personally in their lifetime and also less death benefit lump sums already paid to their beneficiaries. If the member’s pension assets are greater than their available balance of the LSDBA, any excess funds paid as lump sum death benefits will be subject to income tax, assessed on the recipient at their marginal rate of tax. For some, this could mean their beneficiaries will be subject to tax in respect of lump sum death benefits paid after 5 April 2024.

However, death benefits do not have to be paid as a lump sum death benefit. The same funds could, instead, be designated for beneficiaries’ flexi-access drawdown from which the recipients may draw a pension. We understand from the draft Finance Bill 2023-24, backed up by comment in a recent HM Revenue & Customs newsletter, that there are no plans to change the taxation of the beneficiaries’ flexi-access drawdown. This means any pensions drawn from these funds can be paid free of income tax if:

• the member was under 75 when they died; and
• the beneficiaries’ flexi-access drawdown funds are designated within two years of the scheme administrator being notified of the member’s death.

Pensions from a flexi-access drawdown fund can usually be drawn when the beneficiary chooses. They can be paid in regular instalments, or as ad hoc amounts. In addition, assuming the trustees are content to pay it, the beneficiary can draw as little or as much as they choose, subject to not exceeding their share of the pension funds and subject to there being sufficient liquid funds available.

However, if a flexi-access drawdown fund is to be set up for a beneficiary who is not a dependent of the member, then the member will first need to nominate the beneficiary for a pension to the scheme administrator. This is particularly important, where the member has surviving dependants. The definition of dependants includes spouses, children under the age of 23 and anyone genuinely financially dependent on the member. It does not include children of the member who are over 23 and financially independent. If the member does not nominate the beneficiary for a pension in writing, and is survived by a dependant, then it is unlikely a flexi-access drawdown fund could be set up for the non-dependant beneficiary tax efficiently. 

In this situation, a death benefit lump sum could still be paid to the non-dependant beneficiary, but income tax will be paid on the excess of the lump sum, if the balance of the member’s LSDBA is exceeded. Hence the provision of an expression of wish nominating any non-dependant beneficiaries to be granted flexi-access drawdown funds could be a useful succession planning exercise.

Key takeaways for SSAS members

Expression of wishes forms should be reviewed periodically and kept up to date. It may be worth speaking with your professional trustee, financial adviser and the solicitor dealing with your estate about your wishes for your pension savings and updating the paperwork where necessary.

We have standard expression of wishes forms for our SSAS members to complete to nominate their beneficiaries. However, members can confirm their wishes to the trustees in whatever written form they would like, some preferring to write bespoke letters to the trustees to ensure they have covered all matters they wish to be taken into account. 

We also ask our SSAS members to confirm their dependants to assist the trustees when determining which of the member’s beneficiaries can be treated as a dependant. 

When completing or reviewing your expression of wishes form, among other things, consider:

• Are your wishes clear?
• Have you included all your preferred potential beneficiaries?
• Have you given the trustees the flexibility to provide your chosen beneficiaries with a flexi-access drawdown fund if you do not have sufficient LDSBA available for the benefits to be paid as a death benefit lump sum free of income tax?
• If you have not included a dependant as a potential beneficiary, have you confirmed to the trustees why this is? You may be satisfied your dependant has been provided for sufficiently outside of the pension scheme but you may wish to explain this to the trustees and to your dependant to avoid any challenges to the benefits being paid at the time they become due.

SSAS death benefits are ultimately distributed at the trustees’ discretion and our SSAS Guidance for Trustees on how to decide Benefits on Death provides helpful details. The information with which members have provided the trustees will therefore be important.

If you have any queries about your expression of wishes, you should speak with your professional trustee, financial adviser and the solicitor dealing with your estate. You should also ensure the trustees have a note of your wishes and you notify the trustees of any amendments should your circumstances change.