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.
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.