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FEATURES Pensions


can only be assigned to trust, and failure to do so would mean that the policy would fall back into the policyholder’s estate. As a contract between the policyholder and the insurance company, there is no discretion on death, and IHT could apply. While the above defi nes what is technically possible, scheme rules may vary. Most trust deeds, scheme rules and any irrevocable directions to the scheme should be written to avoid a general power of disposal – the ability of the deceased to require death benefi ts to be paid to their estate – to avoid IHT. As has been observed on the STEP Trust Discussion Forum, not all schemes allow nomination to trust – the NHS scheme and the new workplace pension ‘NEST’ are two examples.


Before 75, but after taking benefi ts Crystallisation of benefi ts is not an absolute. For example, many individuals choose to phase their retirement benefi ts so one pension, with one plan number, may consist of both crystallised and uncrystallised benefi ts. The rules also changed signifi cantly on 6 April 2011, so I will consider only those who die after this date.


Annuity Any dependant’s annuity will be free of lifetime allowance charges, and would be set at no more than 100 per cent of the pensioner’s annuity. However, it is possible to ‘purchase’ ancillary options, which would normally reduce initial income, with a corresponding death benefi t: • Guaranteed period. It is possible to ensure that, irrespective of whether the annuitant or their dependant is alive, the income continues for up to ten years. This would not be subject to IHT where the scheme trustee has discretion as to whom this is paid, but there are two principal complications. First, an ‘open market option’ annuity (as opposed to an immediate vesting pension) would be purchased under the original scheme rules, not the rules of the insurance company paying the annuity, and second, not all annuity providers will exercise their discretion. Income tax under PAYE will be due by the benefi ciary.


• Value protection. Similar, but rarer than a guarantee, it is possible to ensure that a specifi ed minimum total capital value is paid by the insurer. For example, for a GBP100,000 purchase price and 50 per cent value protection, a lump sum would be paid if the annuitant (and any dependant, if relevant) died before the protected (GBP50,000) sum was cumulatively paid out. Again, no IHT is due if the payment of the value protection is subject to discretion, but a fl at 55 per cent income tax charge is levied on the death benefi t. Capped and fl exible drawdown are treated in the


same way for death benefi ts, though as any individual that can elect fl exible drawdown can take their entire fund out, paying at most 50 per cent income tax (45 per cent from 6 April 2013, and ignoring lifetime allowance issues) there’s arguably more planning available to these individuals. In particular, the ‘gifts from normal expenditure’ exemption may apply. On the death of an individual in drawdown, a


benefi ciary can elect to have the fund as a lump sum, minus a 55 per cent tax charge, or a fi nancial dependant can continue drawdown or scheme pension (detailed below), or purchase an annuity. If they elect drawdown they have a two-year window from the date of death to choose another option.


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Scheme pension Most commonly associated with defi ned benefi t schemes, it is possible to pay a scheme pension from any fund that is set up as under a bespoke retirement trust. An example would be an occupational small self-administered (SSAS) scheme, but it is also possible to set up a SIPP on this basis (colloquially referred to as a family SIPP). Like an annuity, a dependant’s pension can be


provided under a scheme pension. It is also possible to provide value protection and a minimum scheme pension period, just like under an annuity. The tax implications are the same, and most schemes will be written with discretion over benefi ts to avoid IHT. Unlike a drawdown plan, which is commonly under a master trust arrangement where all members of the same scheme are under the same trust (albeit earmarked, notionally segregated accounts), the private nature of the bespoke trust under an SSAS or family SIPP allows the trustees to commit to a fi xed-scheme pension that is funded from a collective pool. This allows actuarial surpluses to accrue, which can be used for funding


“A pot ceded from fi ve smaller trust-based schemes could have up to fi ve nil-rate bands”


lean years (either due to poor investment returns or unusual longevity of the pensioner), but should the member die this surplus can be used to supplement other members’ benefi ts, pay scheme fees or even act as an LSDB (with potential additional tax charges). A scheme pension may be especially appealing for those with money purchase benefi ts approaching or above the lifetime allowance.


Post 75


All LSDBs (with the possible exception of excesses under scheme pension) will be subject to tax at 55 per cent, with the income from dependant’s pension and guarantees treated as at early ages. The 55 per cent applies to crystallised and uncrystallised benefi ts, including any PCLS that is due, so it is normally good to take this benefi t no later than 75.


Other considerations Despite the detail above, I cannot cover all scenarios. Specifi cally, I’ve not covered unapproved or off shore pension schemes, or quirks in scheme rules that can override what is permissible. From 6 April 2012, ‘protected rights’, so-called as they came from opting out of the second state pension, have ceased to exist, making many individuals’ positions simpler. However, pre-6 April 2012 estates may have protected rights, and contracting-out benefi ts still exist in some occupational schemes – these are potentially IHT-taxable. Planning in the knowledge of ill health can also result in IHT falling due. Pension contributions are now restricted to much lower levels than before, but in the event of death in two years of contributions or transfer of benefi ts, IHT may fall due. If a member is in good health, this would normally not be subject to IHT, but if in ill health there may be a transfer of value and IHT could apply.


ALISTAIR CUNNINGHAM IS FINANCIAL PLANNING DIRECTOR AT WINGATE PLANNING AND AN AFFILIATE OF STEP


APRIL 2013 75


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