Transfer Advice – transferring in ill health

Recent legal cases have highlighted the extra considerations that apply when a client wishes to transfer a defined benefit pension but is in ill health.

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

Paul Clark …

Many advisers are not aware of the potential IHT issues where an individual transfers funds between two pension schemes when they are knowingly in poor health. HMRC will generally accept, unless there is evidence to the contrary, that if an individual survives two years or more from the date of the transfer, they were not in poor health at the time of the transfer. Remember, on the IHT form 409, all pension transfers made within the last two years of the deceased’s life, need to be reported by the executors to HMRC.

It may well be that the potential death benefits offered by the DB scheme are poor; e.g. there is a large CETV and little or no benefit payable on the member’s death as there may be no one who qualifies for the dependant’s pension. Therefore, even if there is IHT, 60% of a large CETV is much better than 100% of a very low death benefit.

In the recent Staveley case, HMRC lost its appeal to the Upper-Tier Tax Tribunal when looking to impose IHT on her transferred pension fund. However, at the time of writing, it is not yet clear whether HMRC will appeal the decision or bring a different test case. Certainly, HMRC’s IHT Manual pages, IHTM17000 et al have not been updated to reflect the decision.

So, clients who transfer pensions when they are in poor health, or who die within two-years of a pension transfer, need to be warned as to the potential for IHT to be charged. See HMRC’s IHT Manual page IHTM17072 for more details.

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Our View

Transfer advice is already complex and high risk – for client and adviser alike. A client in ill health poses several additional layers of complexity and Paul has summarised some of the IHT considerations here. 

Don’t forget the vulnerable client aspects too.

Action Required By You

For information. 

Contact Paul directly if you have any queries. 

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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