An interesting question has been raised that I don’t know the answer to. Can anyone help?
Where death benefits from a pension account, for someone over 75 are nominated to a discretionary trust, the death benefits suffer the trustee tax charge of 45%.
Where the beneficiary is a disabled or vulnerable person, can the pension member direct the death benefits to a disabled persons trust upon death and enable the beneficiary to benefit from the advantageous tax treatment?
Thank you
It will depend upon the terms of the Pension trust, in my experience many only allow a trust to be created until a minor attains age 18 (if at all).
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
The 45% special lump sum death benefits charge applies where the payment is made to someone other than an individual (*). As such, it would apply if the money was paid to the trustee of a disabled persons trust. So while there may be subsequent tax benefits of the money being paid into a disabled persons trust, it won’t change the 45% income tax on the lump sum.
The (*) is because it also applies if it paid to an individual in a representative capacity, e.g. an individual in their capacity as a trustee (other than as trustee of a bare trust).
Thank you. That’s helpful
Hi Robin
M&G are saying the 45% may be reclaimable by the beneficiary on distribution. They are referencing the Finance Act 2004, section 206 (7-10). Maybe a conversation with M&G then your trust tax adviser. This is not my area of expertise as I refer to our tax consultant but maybe worth further investigation.
My experience is that those who nominate a discretionary pilot trust to receive sums which are liable to income tax are not aware nor made aware of this 45% charge on the trustees and the planning needed to distribute it with a repayable credit. That is management of any high income DT.
They are usually aware that payments to individuals will bear income tax at the recipient’s own rates of tax. The cash flow consequences of this may be better. A DT allows the net fund to be distributed over a longer period than the pension trustees can permit to beneficiaries whose personal allowance and basic rate band can be used to generate tax repayments.
An alternative for a minor is a bare trust with s31 TA 1925 excluded but there is no flexibility and the fund must be paid out at majority unless a settled advance under s32 is feasible as benefiting the person in question.
A DT allows much more flexibility about when and to whom the funds are distributed. The cash flow cost, and the opportunity cost of investing, must be weighed. This may be unattractive if the intended beneficiaries are already significant taxpayers unless they need protection from themselves or others.
The pension fund trustees will be happier if an existing pilot trust set up by the pensioner is nominated by him or her than being asked to pay into one set up ad hoc. At the end of the day they retain discretion and must act as trustees; they can’t be compelled to do anything specifically.
If these funds are going to be liable to IHT in future I query whether this discretionary fig leaf will serve any practical purpose and the pensioner will want to be able to own the funds and leave them by Will. If they are going to be subjected to IHT and income tax and can’t be left by Will the decision to save for retirement by this means may be much less attractive. Restricting or abolishing the 25% tax-free sum could see their total demise where no arm’s length employer is making contributions that cannot just be replaced by extra salary. So the death of pensions? More unintended budgetary consequences.
Jack Harper