Transfer Advice – leaving funds to the next generation

The possibility of leaving funds to the next generation is often one of the reasons given in a suitability report for an individual wishing to transfer out of a DB pension scheme into a PPP/SIPP.

We asked Paul Clark of RussellDene Consulting to share his thoughts around this aspect. 

Paul Clark …

It is important that this aspiration is fully explored in the suitability report. The following is a list of some of the areas that should be considered, it is not an exhaustive list and it will need to be tailored to each client’s individual circumstances:

  1. Statistically most individuals will die after age 75. This means that any pension funds will have been assessed against the LTA at 75 and when the death benefits are paid out they will be subject to PAYE in the hands of an individual recipient or at 45% in the case of a trust. These rates of income tax need to be compared to the 40% rate of IHT. In some cases, the pension will be the most efficient asset to pass on, but not always.
  2. Cashflow modelling will often be used to show a client how their pension fund will meet their income needs. However, it will also demonstrate how the capital is accumulated/depleted over time. Use this model to discuss the potential amount of pension fund that can be passed on net of any likely income taxes. In simple terms, if the cashflow model shows there will be no money left when it is expected the client might die, how does that leave the objective of providing an inheritance?
  3. Does a client want to be able to have certainty as to who will benefit from their residual pension fund on death? If so, it needs to be explained how the pension scheme trustees/administrators have to exercise their discretion over the recipient of death benefits, so there is no absolute certainty of inheritance. Certainty can be obtained by the use of trusts over pension and non-pension assets, but the price of this is a less attractive tax position. Control comes at a price. 
  4. If the TVAR shows the income from the transferred fund will be less than that from the DB scheme, why not use the excess DB pension income to fund a whole of life? Guaranteed sum assured and “guaranteed” income.

Remember, to explain in the report to the client how to complete the selected scheme administrator’s expression of wishes covering both the payment of lump sum death benefits and more importantly who is to have the option of a beneficiary’s flexi-access drawdown. If the member hasn’t made a nomination for income benefits, then it is possible after their death for the scheme administrator to make such a nomination, but if there is a dependant of the deceased alive at the time, they can only nominate a dependant to receive a drawdown pension.

Remember, that the designation to drawdown must be made in the scheme of which the deceased was a member, immediately prior to their death. If they desire their beneficiaries to be able to have a drawdown pension, the plan to which they are transferred must facilitate this.

It is no good telling a client in a suitability report about all their options, if they are not told how to ensure their wishes can materialise. Once they are dead, it is too late to sort it out!

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

We are certainly seeing more cases where one of the drivers for clients seeking to transfer is the option to leave what can be sizable funds to next generation rather than see it disappear in the event of early death. But, as Paul has indicated, it is not a no-brainer.

Rationale such as …

‘the critical yield is very high but you want to <insert any feature of pension freedoms – flexibility, take cash but not income, etc>’

… is risky. A high critical yield for a client with a need to draw funds at a level approaching the scheme pension is not likely, all things being equal, to have much in the way of funds to leave.

It is important to base any recommendation to transfer on the balance of all factors. Critical yield is important but not exclusively so, or any more so than the other factors in isolation from the whole picture.

It is the balance of all relevant factors that matters when assessing what is in the client’s best interest.

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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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