Estate Planning Guide

23 22 ESTATE PLANNING OPTIONS ESTATE PLANNING OPTIONS The actuary is concerned with the retirement fund available and the retirement income it can support. To be classed as a ‘scheme pension’ the following conditions must be satisfied: • The pension must be paid at least annually for life • The pension must not reduce, except where all the ‘scheme pensions’ under the scheme are being reduced on the basis of advice provided by the scheme actuary. This means the ‘scheme pension’ option can only realistically be provided where the benefits for all scheme members depend upon the performance of the same fund. This is known as a ‘pooled fund’ basis and schemes that operate on this basis are: • Employer-sponsored occupational schemes for directors and/or senior employees, known as Small Self-Administered Schemes (SSASs) • Provider-sponsored personal pension schemes for family groups, known as Family Self Invested Personal Pensions. The scheme administrator has discretion to allocate investment growth at the end of each scheme year, usually on a pro- rata basis across the various members’ funds. However, it is possible for the scheme administrator to allocate investment growth disproportionately with the agreement of all the members. For example, the scheme pension arrangement potentially allows allocation of benefits on the basis of personal factors such as longevity so that, for example, members in poor health may be able to receive a much higher income than under drawdown pension both before and after the age of 75. The ‘scheme pension’ basis often permits a higher level of pension benefit to be paid than would be available under either an annuity or drawdown pension. This could increase the scope for making or increasing gifts out of income during the lifetime of the member. Another potential advantage is that if the member dies within the fixed payment period (the pension scheme member can choose to have a scheme pension paid for a fixed period of time, for example 10 years), payments would continue to the end of the period as long as the remaining fund is sufficient to provide them. The key consideration for the recipients of such payments is that they are not normally liable to IHT as they are paid at the discretion of the scheme administrator. The payments would, however, be potentially subject to IT in the hands of the recipient. Any surplus, whether generated by unexpectedly good investment performance or a reduction in the period for required payments, can be redirected to other members of the scheme, for example younger family members. If paid out as retirement benefits, 25% can be drawn tax-free as a Pension Commencement Lump Sum, and if it is subsequently paid out as a death benefit before age 75 from an uncrystallised fund, it will be fully exempt from both IHT and IT. Incidentally, lump sums paid out from uncrystallised funds, where the member was age 75 or over when they died, will be subject to tax at the beneficiary’s marginal rate. If a scheme member, receiving a scheme pension, dies aged 75 or over, the funds required to provide the payments for the remainder of the fixed period are ring-fenced within the pooled fund; a capital protection lump sum may be paid from any remaining fund; and, where any further funds remain, they can be used to provide an income for a dependant. Flexible member-directed pensions, such as small self-administered schemes (SSASs), self-invested personal pensions (SIPPs) and family pension trusts provide very useful estate planning opportunities which are now significantly more tax efficient since the removal of the 55% tax charge on lump sum death benefits from April 2015. There have always been good reasons to consider such schemes, for example tax-free investment returns, tax relief on contributions and flexible benefit payment options, including some features with estate planning benefits, due to pension scheme assets being held in trust outside the client’s estate. The rules now allow members of defined contribution schemes to nominate an individual as a beneficiary (anyone at any age) to inherit the remaining fund as a ‘nominee’s flexi- access drawdown account’. They do not have to wait until they are 55 to have access to the funds. Additionally, the nominated beneficiary can themselves name a further successor to take over the drawdown pension fund on their death. This will allow the fund to continue to accumulate wealth in a tax-efficient environment. Additionally, inherited pension benefits do not affect the client’s own Lifetime Allowance, so the client is able to continue to contribute to a pension in their own right. These more flexible rules open up new estate planning solutions via pension schemes such as a Family SIPP where multiple members can join and, if they wish, pool their funds or assets. By bringing members of an extended family together under one scheme, it can be a tax and cost efficient way to build up retirement funds. Such schemes allow up to 11 individuals to join, and are not restricted to family members. They allow members to pool part or all of their funds together for selected joint investments, including commercial property purchase. SIPPs A SIPP is a DIY pension that lets individuals choose their own investments and to manage their own pension pot. This is no mean feat – it really requires some investment expertise, experience and time, but it does allow control of costs. One of the costs to consider is the price of advice as the investor is not obliged to engage professional advice on their investments. SIPPs can invest in a broader range of opportunities than standard personal pensions. In fact, most assets are permitted by HMRC, so, for example, A SIPP can invest in the following when a standard personal pension cannot: unit trusts, investment trusts, Open ended investment companies (OEIC), Exchange traded funds (ETF), UK and overseas shares, UK government bonds and bonds and other fixed interest securities. However, some items are subject to heavy tax charges and therefore typically not allowed by SIPP providers. They include: any item of tangible movable property (whose market value does not exceed £6,000) – subject to further conditions on use of property, residential property, and 'exotic' assets like vintage cars, wine, stamps, and art. There are also rules that require SIPP investments involving connected parties to be carried out at arm’s length and at market value. If not, tax penalties apply. Aside from this, the same rules apply as those that govern other pensions largely apply.