Estate Planning Guide

21 20 ESTATE PLANNING OPTIONS ESTATE PLANNING OPTIONS a dependant, spouse or civil partner and payments from an annuity can be made tax free where the annuity owner dies before the age of 75. As yet, though, the related costs are unclear. There are two ‘death’ related areas where pension funds could be subject to IHT: • PAYMENTS FORMING PART OF THE DEATH ESTATE Where the member’s estate has a legal entitlement to have the value of the death benefit paid to it then the death benefit would normally form part of the member’s estate. • LIFETIME TRANSFERS OF DEATH BENEFITS This can occur when death benefits are assigned into trust and potentially where there is a transfer between pension schemes. Where the member is likely to survive to take their retirement benefits, then the transfer of value would be nominal. However, if a transfer is made whilst in poor health then the value could be more substantial. UNCRYSTALLISED PENSION FUND A pension fund from which no benefits have yet been extracted in any form is an uncrystallised pension fund. Arranging an uncrystallised pension fund under an appropriate trust may permit the scheme member to pass the entire accumulated pension fund to their nominated beneficiaries free of IHT on their death. This is provided that the pension scheme administrator transfers the death benefit within two years of becoming aware of the member’s death. Since 2011, there has been no requirement for a scheme member to crystallise benefits by the age of 75 and uncrystallised funds can be paid without tax charge where the member dies prior to the age of 75. The 2015 pension changes also mean that IHT now no longer applies where benefits are transferred from an uncrystallised fund to a beneficiary where the member dies aged 75 or over. Additionally, payments to charity, where there is no surviving beneficiary, are exempted from IHT. UNCRYSTALLISED FUNDS PENSION LUMP SUM (“UFPLS”) This option was introduced as part of the changes of 2015. This enabled clients to access Defined Contribution pension benefits flexibly, without having to designate the funds for drawdown, thereby retaining their uncrystallised status which can be particularly important from a death benefit perspective. UFPLS may only be paid from uncrystallised pension benefits and for those under the age of 75, there must be sufficient Lifetime Allowance available to cover the full amount of the UFPLS. The minimum age to use the UFPLS is 55 (unless the ill-health early retirement conditions are met). Those aged 75 or over need only some Lifetime Allowance left at that time. If the payment exceeds the remaining Lifetime Allowance, the tax-free element is limited to 25% of the remaining Lifetime Allowance. The rest of the lump sum is taxable as pension income but the member will be subject to the MPAA once the payment is made. In addition, a UFPLS is not available to beneficiaries after the death of a member. SECURED PENSION Generally, purchasing an annuity or a ‘scheme pension’ using the capital of a pension fund will achieve a ‘secured’ pension which will not be subject to IHT. The only restriction on the amount of a spouse’s or dependant’s pension which can be paid is that, for those members aged over 75 at death, the amount payable to all dependants cannot exceed the amount of the member’s benefits. If a pension scheme member had a spouse and dependent children at the time of their death, the combined pension paid to the spouse and dependent children cannot exceed that amount paid to the member before their death. So, a large portion of a spouse’s or dependant’s pension can be added to that of the member. This would continue in payment at that level should the annuitant die before his or her spouse or dependant. Such pensions should not generally be subject to IHT. It is also possible to incorporate a payment guarantee period (in practice, product providers tend to offer guarantees of up to 30 years), so that if the annuity purchaser were to die within this period, payments could continue for the remainder of the chosen guarantee period to an agreed individual who is not a spouse or dependant. Depending upon circumstances, an IHT charge could arise based on the capital value ascribed to the remaining payments due. This is because, when the member’s estate has a legal entitlement to have the value of the death benefit paid to it, then the death benefit would normally form part of the member’s estate. This would occur, for example, where the death benefits from a retirement annuity contract had not been assigned into a trust, or if there was no surviving spouse/dependant to receive the payments. Value-protection can also be included as an option on annuities and scheme pensions, providing a lump sum on death. SCHEME PENSIONS AND POOLED FUNDS In general, ‘scheme pensions’ are now typically money purchase arrangements from which the retirement benefits are calculated not by reference to length of service and salary, but to income limits set by the scheme actuary. 30 year annuity SECURED PENSION Annuitant receives £500,000 Annuitant dies £350 pcm Spouse £150 pcm Dependant