A leading SIPP provider has launched a new bypass trust to help SIPP investors reduce their future Inheritance Tax liabilities.
Suffolk Life, who administers over 20,000 self-invested pensions, with £6 billion of assets, will now make the new trust available as standard on their range of SIPP (Self-Invested Personal Pension) products.
How does a bypass trust work?
Lump sum death benefits paid from a pension before retirement, are usually free of Inheritance Tax (IHT). However, when the beneficiary ultimately dies, any lump sums they have previously received will be included within their estate, potentially increasing the amount of tax payable by their beneficiaries.
Because IHT isn’t immediately payable on lump sum benefits from a pension, it is often overlooked when people make plans to reduce the tax payable on their death; this is exactly the problem the new Suffolk Life bypass trust aims to solve.
The bypass trust is relatively simple in practice:
- During his or her life, the pension scheme member sets up trust, typically a discretionary trust, with a nominal amount of money
- The pension scheme member decides who the trustees will be, these can be the same as the beneficiaries
- The pension scheme member nominates a list of discretionary beneficiaries
- To cope with all potential future eventualities, the list of discretionary beneficiaries should include a wide range of people, for example the pension scheme member’s spouse or civil partner, children and grandchildren
- Crucially, the member then contacts the trustees of their existing pension, to change the existing nomination of death benefits in favour of the new trust
Commenting on the launch Greg Kingston, Head of Marketing and Proposition at Suffolk Life, said: “Providing a bypass trust complements our range of SIPPs and will provide a valuable option for those advisers looking beyond a pension as solely a vehicle for an individual’s retirement”.
What does it achieve?
If the pension scheme member then dies, the lump sum payable from the pension will, assuming the trustees are in agreement, be paid to the discretionary trust.
This means exactly the same people who were previously nominated can benefit, but the money doesn’t sit inside their estate on their subsequent death, thereby reducing the size of any potential IHT bill.
This type of arrangement can be particularly attractive to a married couple, whose estate will be above the nil rate band on second death and therefore be subject to IHT. It allows a wide range of people to benefit from the lump sum payable on death, but reduces the tax payable when the widow or widower subsequently dies.
Whilst the process is usually simple, there are a number of potential complications which pension scheme members should look out for.
Firstly, not all pension schemes allow a trust to be nominated as a beneficiary. Anyone considering using a bypass trust should ensure that the trustees of their pension are happy with this type of arrangement.
Secondly, it should always be remembered that the nomination of the trust as the beneficiary, is not binding on the trustees of the existing pension.
Finally, if the value of the discretionary trust rises above the nil rate band, which has been frozen at £325,000 until the 2017 / 2018 tax-year, then IHT may be payable on the 10th anniversary or on distributions from the trust. However, if the value of the trust stays below the nil rate band no tax should be payable.
Whilst trusts can offer significant tax benefits, they are potentially complex and should only be entered into following professional advice.
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