Changing Jobs? Why You Should Check Your Death-in-Service Benefit

In all the excitement and exhilaration of getting a brand new job, or a big promotion, it’s easy to overlook your death-in-service benefits. Negotiating your new salary, or flexible working is understandably front of mind. After all, new jobs are all about the future, not the outside possibility that you may die while in employment.

Almost all UK employers include a death-in-service benefit, or a lump sum pension pay out, as part of their employee benefits scheme.

Why Check Your Death-in-Service When You Change Jobs?

As you climb the career ladder, it’s not just your salary that increases. Your death-in-service benefit may quietly increase too. Some companies offer as much as ten times your annual earnings.

So a change in job, or in employer, can mean a big leap in a death-in-service pay out. And that can be a hidden tax trap for your loved ones.

Is Death-in-Service Subject to Inheritance Tax?

Many employers’ death-in-service schemes are written under a trust arrangement. Which means the money won’t be liable for Inheritance Tax or IHT when your estate is being wound up.

If the money is then paid as a significant cash lump sum to your next of kin, it will inflate their estate, potentially adding significantly to their own IHT bill.

Can I Protect a Death-in-Service or Pension Lump Sum from IHT?

It’s often sensible to consider death-in-service payments the same way as a lump sum inheritance. And fortunately, there is a way to protect the financial wellbeing of your family, by using a Legacy Preservation Trust(LPT), as a perfectly legal tax shelter.

The LPT can be created during lifetime and the death-in-service payments can be directed there on death. You can make tax-free withdrawals at any stage, for any amount, but what is left in the trust sits outside your IHT estate.

As with all trusts, taking expert financial advice is key to peace of mind. Knowing why you’re setting up a trust is as important as choosing your trustees. So it’s worth discussing with your financial adviser how you want your money to benefit your loved ones. For many families, an LPT might be there to provide income, or cover school fees. Or it may mean you can clear a mortgage early or set children up in business.

Is It Difficult to Set Up a Trust?

Trusts can sound daunting, but they shouldn’t be. Setting up a trust, like making your Will, is something many people shy away from. Even if a trust is going to make good sense from a financial planning and tax efficiency perspective, it often sits on the back burner. People are concerned that trusts are complicated and time consuming to set up, but if you’re clear about why you’re doing it, and who you want your trustees to be, it’s quite straightforward. It doesn’t involve reams of paperwork or a large number of trustees.

Your trustees will base their decisions on the instructions you leave behind. So it’s important that you leave a letter of wishes, which you keep updated, for trustees to refer to. Talk to a financial adviser before you make any decisions to make sure you’re clear and to set your mind at rest.

Who Will Receive My Death-in-Service Benefit? Checking the Rest of the Small Print

Whenever you change jobs or employers, do check that you’ve completed the Nomination of Benefit or Expression of Wish form and that the details are up to date. This says who you wish to receive the payment in the event of your death.

However, if you’ve been with a company for a number of years, the people you nominated as beneficiaries, back when you started, may not be the people who are now a priority to provide for. Just like our professional lives, our personal lives don’t always move in a straight line.

If, for example, you’ve remarried, or your circumstances have changed, you may want to change your nominated beneficiaries or allocate the funds differently. Death-in-service schemes often pay out into discretionary trusts. This means your employer – as the trustee of the scheme – has the final say over who receives the money. Even if your Will nominates different beneficiaries from your original Expression of Wish form.

Related Facts

• Death-in-service benefits are typically a multiple of your salary, usually between two and four times your annual gross income.
• Inheritance Tax is currently charged at a rate of 40% on the portion of the estate over a £325,000 threshold.
• Legacy Preservation Trusts (LPTs) can be used as a legal tax shelter to protect death-in-service or pension lump sums from Inheritance Tax.
• Setting up a trust, like making your Will, is a straightforward process that can benefit your loved ones financially.

Key Takeaway

When changing jobs, it’s important to check your death-in-service benefits and consider the potential implications for Inheritance Tax. By using a Legacy Preservation Trust (LPT), you can protect your family’s financial wellbeing and ensure that the lump sum payout does not add to their IHT bill. Consult with a financial advisor to understand how setting up a trust can benefit your loved ones in the long run.

Conclusion

Changing jobs is an exciting time, but it’s crucial not to overlook your death-in-service benefit. With potential implications for Inheritance Tax, it’s important to understand how you can protect your family’s financial future. By utilizing a Legacy Preservation Trust (LPT) and seeking expert financial advice, you can ensure that your loved ones are well taken care of in the event of your death. Don’t let this hidden tax trap catch you off guard – take control and make informed decisions about your death-in-service benefit.