I have a client who built up substantial occupational pension scheme benefits from his long career but whose wife has unused annual tax allowance. They have no intention of divorce and have set up a family trust involving severance of the former joint tenancy in the family home.
Is there a mechanism whereby they could in effect sever the pension benefits similar to severance of joint tenancy without getting a divorce? The benefit would be the wife would pay far less income tax by utilising her unused personal tax allowance.
Iām aware of death benefit nominations but this question is about the current position and the monthly payments from the occupational pension scheme which are made solely in the husbandās name and taxed at the higher rate on this basis.
Is there a way of putting half the pension income into trust with the wife as beneficiary?
I am wary of answering without knowing what kind of pension scheme or ātax allowancesā are involved.
Much strictly depends on the fundās rules but tax break conditions will invariably prevent uncrystallised benefits being assigned during the memberās lifetime, by making them contractually non-assignable.
This may not apply to prospective lump sum death benefits, at least under a personal pension scheme. These are not immediately assignable but as a future contractual chose in action can be made the subject of a lifetime trust the trust fund of which should exclude future pension benefits.
If you are thinking of the IHT charge from 6 April 2027 there will be a spouse exemption allowing a survivor to inherit and then use his/her NRB at their own death. Seeking to use that route while both are alive will depend on what can be settled on a trust now under the scheme rules: given the above future exemption, this would afford only a limited upside to an immediate bare trust for the survivor absolutely. A downside would be that the survivor might be an ex-spouse by the memberās death!
If the spouse pre-deceased the member the bare trustās asset would be of dubious and possibly no value if technically its receipt still depended on the pension trusteesā exercising discretion (so a mere hope of benefit). This will still be so under the new IHT changes unless the fundās rules are changed to make the benefit non-discretionary (as some schemes do even now).
Income tax will need to be dealt with if the member dies after age 75. A nomination should be made to include not just the surviving spouse but others if she has predeceased and the trustees have discretion (payments to others under the new IHT changes will not be exempt). This income tax charge also needs to be considered when such benefits are paid into a trust other than a bare trust, either made in the lifetime of the member or by nomination. The initial charge rate will be 45% subject to refund for beneficiaries who receive distributions. This can be mitigated by the trust beneficiaries having fixed income interests appointed to them before the pension trustees pay out. These trusts will still be an RPT for IHT so there may be a risk of tax at a TYA if income on hand arose more than 5 years earlier: s.64(1A) IHTA.
Another strategy would be to draw down now all or some of the income tax-free lump sum and gift that to the spouse. If a pension is also taken now that can be gifted too; there is no bar to assignment of a pension in payment and the spouseās liability may be less. Again there is the risk of a divorce and the purely financial pros and cons need evaluation: on whether to do it at all and if so to what extent, as opposed to leaving all or part in the fund to grow.
As Jck suggests the first step should be an analysis of the scheme rules. I doubt if an approved scheme will permit an assignment except where there is pension sharing on divorce.
I share Jackās wariness! From the question it sounds highly like that this is a trust-based registered occupational scheme and the husband is already receiving regular monthly payments. The answer below is based on those assumptions, which should of course be checked.
To have gained tax approval in the first place, the rules of the scheme must have included provisions forbidding alienation. The trustees must therefore pay any benefits to the member while the member is still alive, and can then pay pensions only to survivors in accordance with the rules of the scheme (divorce with a pension sharing order being an exception, as noted above).
If it is a defined benefit scheme there will be no further option to take tax free cash from the scheme. That was a one-off opportunity at the point the husbandās benefits were first put into payment.
If it is some sort of hybrid (defined benefit, possibly with a defined contribution section under the same trust in respect of the latter part of the husbandās service) it is unlikely in the extreme that the scheme would offer phased drawdown in respect of any part of his pension. Again, that will mean there is no further opportunity to do anything other than continue to receive regular monthly payments.
Transferring out is not an option once the pension is in payment.
As others have mentioned, there are different types of occupational pension schemes and Iāll just assume it is a registered one rather than something that is the left over of a scrabble game (FURBS, UURBS, SUURBS, EFRBS and so on). If it is unregistered then reading the rules of the trust (if there is one) and pension scheme will be worthwhile.
So having simplified things, the answer is āno, it is not possible from an income tax perspectiveā. The only time it might ok is (i) following a pension sharing order on divorce, or (ii) in relation to the guaranteed element of annuity after death.
Why? Because anti-avoidance rules stop are designed to stop the assignment. Basically:
some amount will be treated as being an unauthorsed payment made by the pension scheme to the member (and so taxed on the member),
if the member assigns (or agrees to assign) either (i) the benefit to which they (or someone else) are entitled to (or may prospectively be entitled to) under the scheme, or (ii) any sum or assets held by the pension scheme.
The amount of the unauthorised payment would be the armās length price that an actuary would pretend that the member would have got for assigning it.
The tax rate on the unauthorised payment is something that Iāve never bothered to get to grips with but is something like 40%, with the possibility of a 15% surcharge and a further scheme sanction charge of up to 40%. This sort of thing makes the pensions scheme administrator quite reluctant to get involved in any harebrained schemes.
If you are the kind of person who likes detail then have a look here. That legislation has replaced the analysis in the Stubbs case mentioned above.
The theology of assignment of things in action is strictly about personal property. Legal textbooks on that subject cover it but those on contract and equity do so too, as regards contractual and equitable rights.
The starting point is to ascertain the particular characteristics of the right to be assigned. A fundamental one such is whether it can be assigned at all, either on legal principle or intrinsically as by choice of parties on creation. Where the proposed assignment is to be voluntary another facet is whether the nature of the right requires consideration in order to be immediately effective and what counts as such in law and equity.
Pension benefits confer rights which are a mixture of contract and trust law underpinned by the tortuous tax rules which act as guardrails to prevent frowned-upon exploitation.
Occupation schemes are more restrictive than personal pension schemes but, as others have pointed out, both are likely to make benefits non-assignable or clobbered by the tax rules if assigned.
While this is all understandable as prohibiting or inhibiting premature access to funds attracting favourable tax treatment for a retirement purpose there is less justification for that once benefits are in payment.
I have never come across a scheme which attempts to impose restrictions on the tax-free lump sum once it has been paid over (though there are anti-recycling tax rules). A pension in payment is another matter. This is in principle lawfully assignable, at least in equity. But because founded in a contract between payer and payer it can be made non-assignable by agreement, so the rules of the scheme are critical in determining this.
This is much more common with Occupational schemes especially in the public sector. Personal pension schemes can be expected not to do this because usually after attainment of the minimum age even the entire fund can be drawn down (subject to tax) or used to purchase a (taxable) annuity, even from a different provider. It is hard to see why HMG/HMRC would have any concern (or justification!) for forbidding assignment of the annuity save on a Nanny State basis. I would be interested in othersā direct experience of pension annuity providersā approach.
Non-assignability can affect other intangible rights in action, like a share in a private company whose transferability is subject to the Articles and/or a shareholdersā agreement. Pre-emption provisions often prescribe the asking price and the permitted transferee. In theory this can be got round by an assignment in equity only or a trust over the equitable interest alone. However, having once been close to being caught out, an attempt to do either can sometimes result in expropriation (usually at a price in case Ā£0 is against public policy). This emphasises the crucial need to determine in every case whether an intangible is assignable at all.
PTM133200 is very helpful on assignment. A registered pension scheme (regardless of type) or insurance company is likely to prohibit assignment of a pension annuity, by the member or PRs or a permitted dependant, because payment to any such assignee would be an unauthorised payment. The same outcome must follow even if the pension was not made formally unassignable by the scheme rules/contract. This chimes with the practice of creating a lifetime trust of death benefits that excludes pension benefits from the trust fund.
I readily concede that I am not an expert on the tax and legal aspects of schemes but I expect the provider to explain them so the position can be checked with someone who is, if any doubt nonetheless arises.
Recently I reviewed a home-made Will of a friend who used to be a tax expert but on repos, debt-equity swaps and other MNE arcana. He did a good job overall but purported to leave his pension pot, a nonsense on a par with Tower Bridge (also not owned). We mused over what effect this might have on have on his non-binding nomination, even though currently there is no conflict. If they were to differ in future the pension trustees might be confused, poor dears. In my view this will remain so after 6 April 2027 unless the scheme rules are changed to excise the fig leaf of the discretionary basis.
As far as I know there is no proposal to extend the IHT fiction to the real world and allow such discretionary funds to be left by Will. Nor will they come within s.142 IHTA. Jointly owned property sneaks in through the words āor otherwiseā and by dint of s.4 fictionally timing the TOV as immediately before death. So in a sense a discretionary pension pot would be another type of asset not owned in the real world the disposition of which can still be varied. I have however very little confidence in those who commission tax law as regards their ability to wargame even its most blindingly obvious logical consequences, duly pointed out to them and necessitating a U turn, if we are lucky.
Thanks Jack and thank you all. Although I got my answer early it has been an informative thread to understand the nuts and bolts of why they add up to āNOā
If the wife is under 75, she could always put Ā£2,880 into a personal pension each tax year until she hits 75, and the provider would claim basic rate tax on her behalf and add it to her pot (thus bringing the value up to Ā£3,600), even if sheās a non-taxpayer. That applies even if she has no ārelevant earningsā. I appreciate the husband is doubtless hoping for a rather bigger tax saving, but if heās only ever been in an occupational scheme, he may not be aware of this possibility - which is better than nothing!