Hello,
we are getting a lot of cases where pension death in service funds are being paid out to minor children. in these cases the pension trustees seem to suggest that they are not willing to be classed as trustees. the letters generally clearly state the benefits are to be held for the child until age 18 - so I would suggest an implied absolute trust by the actions. In this circumstance you would suggest the trustees of the pension scheme’s actions would place them as settlors.
they disagree.
in many other cases they are stating the money will be paid into a trust for the child once a trust has been created. In these circumstances again, who would be classed as the settlor of this trust?
I am sorry if this has been raised before but I cannot find a definitive answer. As the funds are held and come from the pension scheme I would see them as the settlors and not the deceased member they were holding the monies for.
Any comments would be appreciated.
Kind regards
lottjason
I would follow the money. Assuming the employer has funded the scheme, they would be the employer. That should only really have significance for TRS and, I guess, bank forms.
EDIT: I should have said that the employer would be the settlor (my original statement is technically correct, albeit totally unhelpful).
Pension Scheme trustees invariably refuse to become trustees of a continuing trust. They will pay into an existing trust but may insist that the trustees are nominated by the fund member. When funds are paid by them into a trust the settlor is the fund member. Where the commencement of the trust is relevant as an RPT is for IHT the date is when the fund member became such. They will deduct tax at 45% on a payment into a trust or 40 % if outright. Such tax may be repayable if trustees distribute income to a minor.
If the trustees of the fund will pay to the minor’s parent (dependent on the scheme rules) and a parent who has parental responsibility can give a valid receipt to them under s3 Children Act 1989. How that parent then deals with the money is governed by the rest of the Act but subject to that he or she can make decisions about the child’s property. I am not a family law expert but that might well include making a settlement on a minor child for an absolute interest to which s31 would apply and possibly a disabled person’s trust for IHT. I suggest that technically the property remains that of the child so the parent is not the settlor and the child is.
Jack harper
| lott67 jason lott
25 June |
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Hello,
we are getting a lot of cases where pension death in service funds are being paid out to minor children. in these cases the pension trustees seem to suggest that they are not willing to be classed as trustees. the letters generally clearly state the benefits are to be held for the child until age 18 - so I would suggest an implied absolute trust by the actions. In this circumstance you would suggest the trustees of the pension scheme’s actions would place them as settlors.
they disagree.
in many other cases they are stating the money will be paid into a trust for the child once a trust has been created. In these circumstances again, who would be classed as the settlor of this trust?
I am sorry if this has been raised before but I cannot find a definitive answer. As the funds are held and come from the pension scheme I would see them as the trustees and not the deceased member they were holding the monies for.
Any comments would be appreciated.
Kind regards
lottjason
thanks a lot for the responses to this question, much appreciated!
Are the employers trustees?would that not be the pension fund trustees? The pension contributions are part of remuneration and are not intended as a contribution to a trust, the trust being created by the pension administrators.
I would have thought the deceased employee was the settlor in accordance with IHTA s.44(1).
… “settlor”, in relation to a settlement, includes any person by whom the settlement was made directly or indirectly, and in particular (but without prejudice to the generality of the preceding words) includes any person who has provided funds directly or indirectly for the purpose of or in connection with the settlement …
The deceased employee has provided the funds; his/her deferred remuneration (being “the fruits of his labour”).
Pension arrangements for employees are a hybrid structure. Contributions are governed by the employment contract but are paid into a trust so that the employee has the protection of trust law around the fund investments which will provide the future pension benefits.
The trustees usually are and certainly should be independent of the employer and not a stooge like a wholly-owned subsidiary.
The trustees usually accept non-binding nominations from the employee as to whom they should pay death in service lump sum benefit. Although as trustees they have discretion they must act responsibly in using their judgment as trust law requires; this will be more difficult without a nomination to guide them. As they are not bound by it, in appropriate circumstances they can pay to a person who is not nominated whom they judge the fund member would have wished to benefit. If the trust has detailed provisions they must observe these or risk breach of trust.
Jack Harper
Unless I am seeing things I said precisely that.
This can give rise to exotic analyses for IHT e.g. the date of commencement for the 10 year anniversary of an RPT funded by payments from the pension trustees is the date the settlor-employee became a fund member and his historic cumulation at that date feeds into the calculation of future RPT tax charges. So events occurring many decades earlier can be currently and prospectively operative for IHT.
Jack Harper
I wonder how many employees are aware they are creating a trust in that case. Is it their intention to create a trust ? The pension contributions are indeed part of remuneration differed until retirement age with those funds invested for future growth within the pension fund enjoying the benefits of tax releif
So what do you see, Mr Riordan, an alternative to the trust? Surely not just an unsecured and unfunded contractual obligation to pay on the part of the employer, risking default and liquidation.
The FCA has recently cracked down on dangerous and, on occasion, simply corrupt practices in the funeral industry: trust arrangements for prepaid funerals were being missold as safe protection mechanisms but specifically allowed funeral providers to dip into the trust funds. No pension trust would permit that.
An individual’s pension requires vastly greater pre-payments and investment of funds for a far greater number of individuals than for a funeral. The pensions system is highly regulated by law.
A major scandal is employers not paying their due contributions to the trustees and spending the money elsewhere, just as football clubs owe to HMRC VAT and PAYE monies that they have collected from customers/ withheld from employees and then spent on something else. And who can forget the abuse of his companies’ pension funds
by Robert Maxwell unlawfully bullying the trustees to make loans to and invest in the shares of those companies.
The record of pension trustees carefully looking after the funds under their control is exemplary.
Jack Harper
The thread has not yet answered the other question which I think the OP raised which is who would be the trustee(s) where the PF pays the DIS benefit to the minor and not to a formal trust. I’m sure I’ve seen in other posts that in such circumstances the living parent or legal guardian would be the trustee?
I though I had answered it. It is lawful for the pension fund trustees to pay the person with parental responsibility for the minor child.
Children Act 1989:
"s.3 Meaning of “parental responsibility”.
(1) In this Act “parental responsibility” means all the rights, duties, powers, responsibilities and authority which by law a parent of a child has in relation to the child and his property.
(2) It also includes the rights, powers and duties which a guardian of the child’s estate (appointed, before the commencement of section 5, to act generally) would have had in relation to the child and his property.
(3) The rights referred to in subsection (2) include, in particular, the right of the guardian to receive or recover in his own name, for the benefit of the child, property of whatever description and wherever situated which the child is entitled to receive or recover."
The trustees are not bound by a letter of wishes or a nomination but they must follow the trust instrument and trust law and exercise their discretions fairly and responsibly like any trustee.
Jack Harper
I wasn’t suggesting anything Mr Harper.
My understanding is that in as a result of previous scandals such as Maxwell. The fact that we are having a discussion shows just how much is understood about pension arrangements in terms of pension funds and death in service. I don’t have much to do with pensions but it used to be that any death in service benefits were paid for with some of the pension premium being used to buy life insurance, pension term insurance. This insurance was a policy, the policy paid out on the premature death of a member and only came into being effective if a person died before retirement age. Usually a beneficiary would be nominated on a nomination form. Whilst the trustees could make the ultimate decision as to who they might pay out to, the nomination form was like a letter of wishes. In my experience I don’t think any on really thought they were creating a trust at that point, I think the understanding was that as with a Will trust, the pension term assurance would be paid in a similar way.
A good IFA or solicitor should be able to help a client who seeks advice on the status of letters of wishes or nominations and the parameters of the trustees’ discretion. Sadly not all such persons are equally good and many fund members do not see fit to seek advice, save from dubious sources whose only plus point is that they do not charge.
A pension pot and a house are key assets even for those with small in total value estates. Pensions may be the more important for Generation Rent. I sympathise with their lack of affordability but up the scale slightly are those who simply do not value advice compared with a new sofa or a week in Torremolinos.
Even at the top of the scale this is an issue. I have a former client aged 80 whose estate is worth £20m which is almost totally illiquid. He has been to see several firms, recommended or introduced by me to my slight embarrassment, but will not pay the going rate. He has been told by at least one high street firm he found himself that it was out of their league (good for them and their insurers). His chosen executor is alarmed. Some are beyond help. And their family will pay the price when they are gone.
Jack Harper
I agree with your assessment, some people know the price of everything but not the value. I too have a high net worth client who is procrastinating with his estate as he ages. The anticipated changes to pensions, BPR and Apr next year have not as yet served any purpose in him making a decision.
You make a valid point, good IFA’s or Solicitors should be able to help, however I have had reason to be involved with both in recent times. On a number of occasions their expertise is not as comprehensive as you would hope, so how do you make a recommendation unless through a positive experience .
I do believe there is a gap in knowledge across the financial and legal professions resulting in both not wanting to commit in giving direction other than to say seek advice. I know of IFA’s who know very little about trusts but everything about DBS and DC pensions. They have enough to do without getting involved in trusts I suppose.
Apologies Jack, you did.
An interesting insight on pension trustees’ approach to exercising their discretions is in a recent Pensions Ombudsman’s decision at https://www.pensions-ombudsman.org.uk/sites/default/files/decisions/CAS-72134-V5K7%2C%20CAS-72135-Q7V1.pdf
Jack Harper