30 August 2023

Changing jobs? Why you should check your death-in-service benefit

At a glance

  • Changing jobs, or even getting promoted, can increase your death-in-service benefit – and leave your family with a higher Inheritance Tax (IHT) bill.
  • Arranging a Legacy Preservation Trust can help protect your family and their financial wellbeing in the future.
  • Taking financial advice before setting up a Trust will help you feel confident that you’re doing the best for your family if the worst should happen.

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.

A death in service benefit is a lump sum pay out to your loved ones if you die while on the payroll of that company. Most death-in-service benefits are a multiple of your salary – typically between two and four times your annual gross income – paid to your chosen beneficiary.

But that large lump sum can have an unintentional side effect – leaving your loved ones with a higher Inheritance Tax bill down the line.

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. Currently, IHT is charged at a rate of 40% on the portion of the estate over a £325,000 threshold, or up to £500,000 if it includes a family home worth at least £175,000 that is being passed on to direct lineal descendants.

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 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 us 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 to your original Expression of Wish form.

Thinking ahead for the whole family

Protecting family assets is one of the most important things you can do in later life. Just to state the obvious, when you retire, there’s no death-in- service protection, so it’s always a good idea to think about whether you need to replace what your pension pay out will be when you die, with a life insurance policy.

The value of intergenerational wealth planning is the ability to move money across generations, where family members who want to support family are able to help others, tax-efficiently.

Looking after those you love, and making sure the right people receive the right money at the right time, is at the heart of later-life financial planning. Having a chat with your financial adviser whenever there’s a big family event doesn’t need to wait until your annual financial review.

We’re here to promote your financial wellbeing throughout your life, supporting you through marriages, new grandchildren – and brand new jobs.

Do get in touch with us if you’d like to find out more about trusts, or later life legacy planning.

The Legacy Preservation Trust is an advised SJP product, available through a St. James’s Place Partner.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

SJP Approved 24/07/2023

By Matthew Forbes