Enter Your E-mail

TaxationWeb by Bob Fraser MBA MA FSFA

Bob Fraser, MBA, MA, FSFA, Associate Investment Director, Rensburg Investment Management Limited, considers inheritance tax aspects of Section 32 arrangements (‘buy-out bonds’), assigned money purchase schemes, retirement annuities, personal pensions (including stakeholders) and pension fund withdrawal (‘income drawdown’)

Section 32 Plans

The Section 32 is an individual arrangement that can accept transfers from an existing company pension scheme. The Section 32 is purchased by the trustees of the existing pension scheme, in the policyholder’s name. The important point is that it is an individual arrangement. It is no longer covered by the main scheme trust, a point that seems to be invariably missed. Almost no Section 32s are written in trust, which means that on death the fund value falls into the deceased estate. This is potentially very tax inefficient. Although, if the spouse is the main beneficiary under the will, there will be no IHT payable it will increase the spouse’s estate and raise the potential for an IHT bill later.
Individuals with Section 32 policies should therefore check that they are written into trust.

Assigned Policies

It is quite common for individuals with executive pension plans who then leave the company to have the policies assigned to themselves. However, as with Section 32 policies, these then become individual schemes and are no longer covered by the occupational trust. Just as with the section 32 policies, almost none of these assigned policies are written in trust. Individuals with these assigned policies should check that they are written in trust for the same reasons given above.

Retirement Annuities

Retirement annuities have never been able to be written in trust at inception. The trust wrapper has had to be added subsequently, which means that many (one life office mentions 80%+) of these policies are not written in trust at all. This means that if the policy holder dies before taking benefits then the proceeds fall into his estate. Bearing in mind that these policies have to have been started at least 18 years ago, their value may be substantial. Individuals with retirement annuities should check that they are written in trust for the same reasons given above.

(As a side issue, the death benefits vary enormously under these contracts, depending on the provider. Some only give a return of contributions; others give a return of contributions + some interest; some give a full return of the fund – which is what one would expect. Anyone with a retirement annuity must find out what the death benefits are.)

Personal Pensions/Stakeholder Pensions

Most of these pension plans are written under a master trust, with the facility to nominate the beneficiary by filling in a section in the application. This ensures that most plans do have a nominated beneficiary. In the great majority of cases this beneficiary is a surviving spouse or partner. This, however, is inefficient from an IHT planning point of view. The reason is that the partner/spouse’s estate is then increased by the value of the fund. This may be in addition to any term assurance benefits that may also be paid.

Pension Fund Withdrawal

The issue is very similar to that of personal pensions, which is not surprising since these income drawdown plans are written under personal pension rules. The beneficiary is recorded in a nomination section of the application. However, the IHT consequences are likely to be most significant since most of these plans are established by individuals who already have considerable wealth. The implications of nominating the spouse may therefore be more adverse. As with the personal pensions, it may be worth considering establishing a flexible trust to avoid bringing the capital into the spouse’s estate.

Actions to consider

Firstly, if the policy is not in trust, this should be rectified.
Secondly, if the beneficiary has been nominated under a master trust by way of a nomination, then the rationale for this decision should be examined. If the intended beneficiary is a spouse/partner, then a more tax advantageous approach would be to request the pension provider’s normal flexible trust form. This will split the beneficiaries into the default beneficiaries (those with the interest in possession and the right to the income from the trust), and the potential beneficiaries (those to whom the trustees can appoint capital). Ideally the trust wording will also allow the trustees to make loans. The default beneficiaries would normally be children, and the potential beneficiaries would include the surviving partner/spouse. The spouse/partner would be one of the trustees. The benefits of this arrangement are:

 The capital is outside the spouse’s estate.

 The spouse has access to the capital and can draw on it when required. As a belt and braces, the settlor could leave a letter to wishes to the trustees expressing his desire for the spouse to be granted capital on request.

 The capital advanced to the spouse can be done in the form of a loan, repayable on death, which has the effect of reducing the spouse’s residual estate and thus reducing IHT.

 If the spouse is sure that the capital will not be needed, the trustees could distribute the capital to the default beneficiaries without creating the potentially exempt transfer that would arise had the spouse been the beneficiary of the nomination.

Form of Trust – Discretionary or Flexible

You will note that I am advocating a flexible trust instead of a discretionary trust.

The benefits are:

 There is no periodic charge under a flexible trust. Amounts in excess of the nil rate band are taxable periodically under a discretionary trust.

 Life offices often have suitable flexible trusts.

The disadvantages are:

 If capital is appointed away from the default beneficiary that is a potentially exempt transfer on the default beneficiary.

 There is less flexibility.

At the end of the day, either trust is suitable – the important point is to have considered the issue. Please note that this article does not seek to give definitive advice since each individual’s circumstances if different. But where the pension plan is of significant size, and the residual estate exceeds the nil rate band, then these actions should be considered.

Anyone wishing for help in this matter – including finding out the death benefits under retirement annuities – can contact me.

Email your enquiry

March 2005

Bob Fraser, MBA, MA, FSFA
Associate Investment Director
Rensburg Investment Management Limited

Bob Fraser is an associate investment director and has achieved the highest level of professional advisory qualifications in the financial services industry. He is a Fellow by examination of Personal Finance Society, which is a specialist faculty of the Chartered Insurance Institute. He also holds a Masters of Business Administration degree.

Rensburg Investment Management is the largest company in the Rensburg group and a subsidiary of Rensburg plc, a public company whose shares are quoted on the London Stock Exchange. Its core business is investment management and it currently looks after around £3.0bn of funds for private investors, trustees, charities and pension funds. It provides independent financial planning advice and investment management services to both individuals and businesses in order to meet their financial objectives. Financial planning is the process by which resources and risks are firstly identified and then used or provided for in a way which best achieves financial goals and lifestyle. It provides detailed advice to clients across the whole range of financial planning issues from the provision of straightforward life assurance, to savings and retirement planning, to complex inheritance tax planning arrangements.

Rensburg is authorised and regulated by the Financial Services Authority (FSA) whose function is to provide investor protection through the regulation of financial product providers in securities and derivatives business.