Death benefit freedoms mean that clients in a fully flexible scheme can pass on their pensions to anyone. However, in some situations expressing a wish or nominating individuals might be problematic. Another tool to have in the pensions planning toolkit is for the death benefits to go into trust (this is sometimes known as a spousal bypass trust). The trust receives a lump sum death benefit from the pension scheme and then the trustees administer it.
For the under 75s, the lump sum death benefit is usually paid to the trust income tax-free. For the over 75s the special lump sum death benefit charge will apply as a trust is a non-individual. However, payment by the trustees to the beneficiary comes with a reclaimable tax credit. So from an income tax point of view, it works out the same receiving it via a trust as it would be receiving it direct. There are still disadvantages though. Periodic and exit charges may apply, the money is leaving the pensions wrapper and the client has to pick trustees that they trust to administer the funds. But for some these disadvantages are worth it especially if there are some complex family circumstances which a simple nomination or expression of wish won’t deal with.
So when would a trust be useful?
Your client may not want their spouse to receive the entire fund, remarry and then potentially pass to a new spouse, die before that new spouse and then the benefits end up with a completely different family. However, they may not simply want to nominate all family members at death. Trustees can make decisions based on circumstances at the time of payment instead.
Your client may be worried about their spouse remarrying, that marriage breaking down and the impact on their children. Legislation states that there can’t be a pension sharing order on dependants’, nominees’ or successors’ drawdown. However, it still might be a matrimonial asset on divorce.
Perhaps your client doesn’t want their children having access to a large amount of money. A trust means that access to funds can be restricted and avoids the situation of an 18 year old taking a large fund in cash.
If a spouse is in dependant’s drawdown then the fund is considered by the local authority in the same way that it would consider the original member’s fund. If the money is in trust then it can’t be considered but the trustees can help to pay for the care if needed.
For most clients, death benefit freedoms give enough flexibility. However, for those with more complex situations a trust may give extra peace of mind. Benefits can also be split so a certain amount goes to a trust and the rest go directly to the beneficiaries and this could be a good solution in certain situations.
Head of Business Development, Royal London
Clare qualified as a lawyer and Notary Public in September 2002 and is a member of the Law Society of Scotland. Post qualification Clare spent 5 years at Aegon Scottish Equitable in the legal department before moving to Pinsent Masons LLP in November 2007. While at Pinsent Masons, Clare acted for many different pension providers before moving to Prudential for over 6 years and ended up leading the pensions side of the external facing technical team which involved presenting, writing articles for the press and developing adviser facing content. Clare joined Royal London in April 2018 to head up the external facing team of pension and protection experts.