Financial Planning and Trusts - Pensions

Question 1

Defined Benefit Pensions

Answer 1

• Benefit is proportion of salary at retirement
• Set up under trust
o Trustees hold pension scheme assets for scheme
members
o Scheme rules determine how these are paid out
• Usually pay lump sum death-in-service under discretionary trust
o Usually exempt from IHT
o Trustees have total discretion over who to pay lump
sum within beneficiary classes named in scheme
rules
o Member cannot direct trustees therefore lump sum
not part of their estate for IHT purposes
􏰐 May be asked to complete ‘expression of wish’
• Member should keep this up to date
􏰐 Not binding on trustees
􏰐 Trustee have duty of care to consider all potential
beneficiaries
• Spouse / civil partner / dependent children
• Can include spousal bypass trust (see below)
• Trustee usually follow members wishes but not
obliged to
􏰐 NEST death benefits paid under member’s
direction - therefore included in their estate

Question 2

Money purchase schemes

Answer 2

• Usually set up under master trust / deed poll (deed made and executed by one party) / individual trust
• Pension provider is trustee
• Scheme rules determine how death benefits dealt with
o Nomination
o Personal discretionary trust
o Bypass trust
• Trustees have discretion as to who to pay to so as to keep outside member’s estate

Question 3

IHT and pensions

Answer 3

• Usually pension contribution not a transfer of value
o Unless in ill-health at time
o Or if die within 2 years of making it

• Putting an existing Retirement Annuity Plan or Personal Pension in trust is a CLT.
o The value of the transfer is the difference between
the open market value of the plan and open market
value of the rights retained by the policyholder. In
practice this value is negligible as pension policies
have no surrender value.
􏰐 May therefore be covered by exemption
o Provided the policyholder is in good health at the
time of transfer HMRC will regard the value as
nominal, although they may challenge this if the
policyholder dies within two years.
o It is not a GWR because pension rights are not
assignable.
o Future premiums are treated as a transfer of value.

Question 4

Pension Nominations

Answer 4

o Member can nominate who should get their death benefit
􏰐 Revocable
􏰐 Update at any time
􏰐 Usually spouse/civil partner/ dependent children /
bypass trust

o Not binding on trustees therefore benefit free from IHT
o Cannot use on retirement annuity contracts unless written under trust
o Under flexi-access can have dependents and nominees
􏰐 On death of either can then go to successors
􏰐 Can keep pension out of estate for many years