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:
- 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.
- 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?
- 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.
- 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!