If the member died before age 75 withdrawals will be free of income tax whenever taken, and even where death occurred after the 75th birthday so tax is payable, the withdrawals can be managed as appropriate to minimise income tax liability.
A trust may be more of interest where the member has complicated family arrangements and/or they want to provide for people without giving them immediate access to a large sum of money – for whatever reason that may be.
How a discretionary bypass trust can help
If instead of nominating the individuals directly the member nominates the discretionary trust to receive the death benefits, then more control can be exerted. The member can choose the trustees and give them instructions as to how the funds should be distributed.
The second family scenario
A member has adult children from their first marriage, is on their second marriage at time of death and has step-children. Nominates (second) spouse to receive death benefits.
Under a pension when the survivor dies they choose who gets any residual funds – and could choose their own children over the original member’s adult children who would then get nothing. It could also be that the survivor marries again and leaves the funds to the new spouse.
If a trust was used instead, the member could instruct the trustee to provide an income for the survivor in their lifetime, with any residual funds going to the member’s children on their death.
The beneficiary who needs protecting
A member wants to leave funds to provide for a beneficiary but is reluctant to give them access to a large sum of money in one go. This could be for younger beneficiaries or those who lack capacity but could include those who have a history of money problems.
With the trust option, an income could be provided for such beneficiaries, or ad hoc payments made to them for purposes as defined by the member and at the trustees’ discretion. Under a pension there is simply not this option – the beneficiary has access to the funds or not at all.
Taxation
In terms of tax efficiency, keeping funds within the pension will always be the best option. There is a cost of the extra control given under the trust option. However, the level of the cost will depend on the circumstances.
When the trust is created this will give rise to a transfer of value by the settlor (the member) for IHT purposes. It is usual to establish the trust with just a nominal gift of £10, to fall within the settlor’s available annual exemption. Provided no assets are added to the trust while the settlor is alive, there will be no IHT charges in their lifetime.
