FOR ADVISERS ONLY

Reasons why you might put pension death benefits into trust

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.

Key facts

For those with more complex situations a trust may give extra peace of mind.
In some situations expressing a wish or nominating individuals might be problematic.
Trustees can make decisions based on circumstances at the time of payment.
Periodic and exit charges may apply.

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?

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.

Note

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.