Pension Death Benefits
Your pension is essentially a savings plan designed to provide you with future retirement income in your lifetime.
However, when you die (either before you reach your retirement or if you are in draw-down, taking your income) there are very good reasons to have a trust arrangement in place to deal with your pension death benefits.
Before age 75 the current rules allow for the value of your pension to either be transferred to your nominee or be taken as a tax-free lump sum. The decision will be your nominees following your death.
Alternatively a tax-free lump sum can be transferred into a protective family trust (called the “Asset Preservation Trust” or “APT” for short). The APT can also be used for any death-in-service benefits.
The benefits and the protection afforded to your family of using a trust in this way can be substantial:
- The APT can provide protection against the value being decimated at a later date through one or more of your beneficiaries going through a divorce, becoming bankrupt or dying;
- The APT can protect against ‘third party’ claims and is useful in supporting a surviving spouse who may go into care;
- For larger estates, the APT can be used for additional tax planning opportunities for beneficiaries;
- Further pension changes are still being actively considered and the APT should protect against future changes to pension or other legislation, which may otherwise detrimentally affect your beneficiaries’ positions.
The primary benefit of any trust is to ensure family and bloodline protection, at the same time as ensuring your wealth is directed exactly where you want it to go, even long after your death. This is particularly important in situations which involve future re-marriages.
Furthermore, for larger estates trusts can be used to create additional tax planning opportunities and by extension, significant tax savings.
The APT is a discretionary trust which allows your appointed trustees a great deal of flexibility in how the benefits are used. The APT allows your beneficiaries to maximise both bloodline protection and tax efficiency.
- Many pension savers believe that the changes in pension rules introduced in the past few years automatically provide favourable tax treatment, to their beneficiaries, on their death. This is true to some extent but the position is still limited in terms of the opportunity to put in place robust protection against many future risks.
- Without a protective trust mechanism in place, if a tax-free lump sum is taken absolutely the death benefits can quickly thereafter become subject to taxation in the hands of the surviving spouse or children (or other nominated beneficiaries). Lump sums can be subject to future reductions of 40 percent (when the spouse subsequently dies).
- A spouse may remarry and then later become divorced, the divorcing partner then has rights to the sums left from the original pension.
- Or when the spouse dies in the future, the sum from the original pension is now in his/her estate and will be assessed for IHT.
- A daughter or son may inherit from the pension, they could be subject to divorce, bankruptcy or other social problems which could mean the value of the sum left to them could be subject to third-party claims.
- Any one or more of these parties may need care and could have their care-cost entitlements reduced, based on the inherited sum from the original pension.
If you establish an APT now to receive your pension benefits on your death, then you can potentially protect against all of these threats.
Putting such a trust in place is straightforward, you can get the trust in place now ready to receive the benefits should the worst happen and your pension is still active on your death. Your pension stays where it is with your existing pension provider and the APT sits in the background. Even if you change pension provider the APT is still available to receive any death benefits.
The trustees will be guided by your letter of wishes, which although not legally binding will be persuasive. The trustees will always have the power and flexibility to ensue your money goes to your chosen parties in a manner which is both tax efficient and protected.