Pension policies in Trust

by **marc02** on Wed Apr 22, 2009 3:05 pm

I hope someone may be able to help. The scenario is; a father is unwell and in care. A couple of years age he chose to shield his pension policies and created a Trust Deed which states the policies would be held by him in Trust for his children. The policies are due to mature soon and advice on the following would be very much appreciated:

(1) Should his children simply open a back account dedicated for the policies to pay into? Or must it be a special type of bank account?
(2) Are there any taxes due on benefits paid from the Policy into the Trust? - ie: Does the Trust have to pay tax?
(3) If his children withdraw money from the Trust bank account must they pay further tax on the amount they receive?

Any other advise to minimise taxation on this would be great. For example is it permissible, and would it make a difference if the trust account was off-shore?

Thanks

by **AvocadoK** on Fri Apr 24, 2009 7:10 am

When you put pension policies in trust, it's the death benefits that go into trust, not anything else. If the pension starts paying out other than on death, it will be taxed in the normal way. If he dies, a lump sum is normally payable to the people nominated by him to receive it.

As to whether you can stop the pension paying out to Dad before death, it depends on the type of pension. If it is a personal pension, it should be possible to stop it paying out to Dad, as long as he is under 75. On death, the total fund may then be paid tax free to those he has nominated. You need to check out what sort of pension it is with a pension adviser (IFA) or the person who runs the scheme.

1. Not necessary. Dad will have nominated the names of the people to whom the lump sum is to be paid to - you just need to make sure those people have bank accounts.
2. The pension trustees will deduct 35% tax if Dad has started taking pension; no tax if he has not started taking pension (both assume he is under 75).
3. No

AK

by **marc02** on Fri Apr 24, 2009 10:35 am

AvocadoK,

Thank you for the clarity on this. The pension lump sum payouts are very small and therefore the original intention of placing the pensions into Trust is that the regular payouts (which at a premium could be guaranteed for 8 to 10 years) would be for the benefit of the Children.

Would the following therefore be correct:

1. A joint account in the name of the nominated beneficiaries, (who are also Trustees) would be setup. The account would only be used to receive income from the policies.
2. Any income received into these accounts would be subject to 35% tax.

Thank you again.

by **AvocadoK** on Fri Apr 24, 2009 6:51 pm

Marc,
It is only death benefits that can be paid to nominated beneficiaries. Payments made during Dad's lifetime will be taxable on him. Remember that he has a personal allowance of £6k - if the pension is small, might that cover it?

1. I don't think you can do this, as the pension company will probably insist on paying Dad
2. The pension will be subject to tax at 20% (apart from the first £6k, tax free).

If Dad dies during the guarantee period, the balance of the payments will be paid to the kids, after deducting 35% tax

AK

by **marc02** on Fri Apr 24, 2009 11:16 pm

The Trust states that the Father holds the policies in Trust for the benefit of his children (from the date the Trust was created). Even though the Policies (and associated benefits) are clearly stated as being in the Trust, are you are saying that the benefits must be paid “outside the Trust” to the Father? – Is this still the case even if the pension companies agreed to pay income into a Trustees account?

I think this is the final question to help with this.

Thank you again for your support on this question.

by **AvocadoK** on Sat Apr 25, 2009 10:26 am

It's quite common for pension policies to be held in trust. However, it is rare for it to provide for benefits (other than death benefits) to be paid to a person other than the 'member' (i.e Dad). Such a payment would count as an 'unauthorised member payment' in the words of the pension legislation, and be subject to 40% tax plus potentially a surcharge of 15%. The likes of Norwich Union usually set up the policies in such a way as to avoid this happening, esp with small funds.

So, with respect, I suggest that you might have misinterpreted what the trust document is saying. It is much more likely that only the death benefits may be paid to someone other than Dad. However, as you have the advantage of having the documents in front of you, you may be correct in your interpretation, but then the tax charges above would apply. Probably best double checking with the pension company!

Regards

by **marc02** on Sat Apr 25, 2009 11:50 am

The death total benefit of the pensions is much lower than the conglomerated income over the guarantee period of 8 or 10 years. The Trust was created to receive this income.

The Trustees have the option to combine all the policies and move to a single provider who will offer the highest raised annuity. (Trust provides the Trustees with complete management of the pensions in Trust to be able do this).

If the policies were combined with a new provider, from your comment about Norwich Union, is it correct that one should ensure that the new pension provider does not class the payments to Trustees or Beneficiaries as an “unauthorised member payment.” Is there a question that should be asked to the provider being considered to confirm this?
– Assuming this is then setup, would the process mentioned above to receive income then apply:

1. A joint account in the name of the nominated beneficiaries, (who are also Trustees) would be setup. The account would only be used to receive income from the policies.

2. Any income received into these accounts would be subject to 35% tax.

Thank you.

by **AvocadoK** on Sat Apr 25, 2009 1:04 pm

1. A payment other than a death benefit to someone other than Dad is by definition an unauthorised member payment. Nothing you can do will prevent that. My comment re the likes of Norwich Union was just that they will probably just not do it, but you can of course ask.

2. The tax would be 40% not 35%, plus there is the 15% surcharge. The 35% applies to death benefits paid after the pensioner has started to draw pension.\

Have a word with the pension company!

by **marc02** on Sat Apr 25, 2009 4:38 pm

It sounds that with those tax liabilities a Trust may not have been the best advice.

Would it have been better advice for the Father to have formally gifted the pension policies to his children? The tax liabilities would then be IHT from the gift and Income Tax paid by the children for income received the policies. (Again this is on the assumption that the pension companies were to agree to pay directly into the children’s account).

For IHT the value of the gift would be the:

Combined value of the policies at the time of the gift + Total sum of any subsequent payments made by the Father into the pension

Since the Fathers total assets and gifts within 7 years would fall well within the IHT relief there would be 0% IHT liability.

This would then leave only Income Tax liability.

For the purpose of removing the pension from the Fathers estate while ensuring maximum benefits are received by the children, would this have been a better solution?