Apart from your house, the most valuable asset in your estate is likely

to be your pension fund. This will almost certainly include a death

benefit to look after your family. But how can you stop the Taxman

from getting his hands on it?

 

The problem

 

During a meeting with your financial advisor about your pension

he suggests your new policy is ‘written in trust’. Seeing the blank

look on your face he hastily adds, ‘it will save Inheritance Tax’ (IHT).

Five seconds later you’re putting pen to paper. Your advisor asks

who you want to name as beneficiary(ies). Of course, you nominate

your nearest and dearest. But have you just signed over a chunk of

your estate to the Taxman?

 

What does your advisor mean?

 

When your advisor talks about writing the policy in trust, he’s referring

to the lump sum that would be paid out on your death. If you don’t do this, the payout will be treated as part of your estate for IHT and could end up being taxed at up to 40%. That could be a large chunk of cash that should be in your family’s bank accounts, now ling the Taxman’s pockets.

 

Definitely in trust, or is it?

 

You remember signing a trust document for your pension some years ago. That should be the end of the story but it may not be. If the pension was a company or group scheme relating to a business you were previously involved with, the original trust deed you signed may no longer apply. Or perhaps you have transferred one pension plan to another insurer without putting the new policy in trust. So you could be back at square one, with the Taxman waiting in the wings and rubbing his hands with glee.

 

Tip

 

If you’ve moved on from one business to another or shifted pension funds, then follow the previous tip by checking with your financial advisor or pension company.

 

The policy is in trust, problem solved?

 

Making sure the proceeds of your policy are in trust is a good start. But what if the worst happens to you shortly before you retire and your spouse receives the tax-free lump sum from your pension fund. That immediately creates another IHT problem. To be blunt, your partner could be in their autumn years, and so a big boost to the value of their estate at this stave isn’t good IHT planning. So what’s the solution?

 

Your flexible friend

 

One answer is a ‘Flexible Power of Appointment Trust’ (FPAT). Under its terms, the pension lump sum is held on trust and the income it produces is paid to so-called ‘default beneficiaries’ you nominate, usually your children. But the trick is that the trustees are allowed to pay out capital to anyone, e.g. your spouse. So their estate isn’t boosted all at once but drip-fed as and when the money is needed. These types of pension trust are available off-the-shelf from most pension companies, usually without additional cost.

 

Tip

 

The trust can be set up to lend money rather than pay capital to your spouse. That can save further IHT as the loans will be a debt in your spouse’s estate and so will reduce its value for IHT.