Bypass Trust

gadgetmind

Is this a good place to discuss Bypass Trusts or would Cutting Tax be better?

Between my pension pots (SIPP and GPP) and my Death In Service life insurance, I'm already at a modest multiple of the IHT threshhold, so a Bypass Trust might make sense.

However, I'm a shave under 50 and hope to retire in 5 years, so the trust won't really have a role for very long.

Anyone else set one up? It looks like an easy enough DIY but I guess cost of doing via IFA should also be quite reaonable I'd have thought.

System

I'm in the process of setting one up. Our company adviser/IFA is organising it - I think we are going to use the SIPP provider pro-forma (Suffolk Life), but modified to suit circumstances.

There are some good downloadable samples at James Hay, Scottish Widows, and others. Basically it is just a discretionary trust, so you need trustworthy trustees, preferably family members, with as wide powers as possible to vary payouts to beneficiaries. The trust may have advantages beyond just spousal bypass, ie into further generations, so the class of potential beneficiaries and the powers of the trustees should be widely drawn.

Also important is the wording of the Letter of Wishes that you give to the pension provider. One of the samples, perhaps the James Hay, instucts the provider to consider 3 possible options exercisable by a widow - drawdown (full or partial), purchase of annuity (full or partial) or by default of option, payment of benefits into trust.
Circumstances may change, rules may change, and you can't predict how much of the SIPP will be crystalised in the event.

gadgetmind

Thanks for that. I understand the beneficiary can be a trustee, but I guess you don't want them as the only trustee?

xylophone

http://citywire.co.uk/new-model-adviser/beware-iht-traps-when-using-trusts-for-pension-plans/a438858 might be of interest.

gadgetmind

Yup, I think that one of the many (very many!) such articles that I read.

I'm 75% sure one makes sense for me, I'm just not sure whether it's worth spending much setting one up if I'm going to fully crystallise in five years.

System

Even if fully crystalised, if there is going to be any pot left to pass on, even taxed at 55%, it might still suit your circumstances to keep it out of your survivor's, or childrens', estates?

gadgetmind

I thought a bypass trust only worked for death benefits and not for remaining pot once crystalised? The intention would be for pots in drawdown to be used as pension for surviving spouse and then anything left (hopefully not much!) would be hit with the 55% tax.

System

gadgetmind wrote: »

anything left (hopefully not much!) would be hit with the 55% tax.

The amount remaining in the pot after your death can be used to continue drawdown for a beneficiary, or paid out as a death benefit, taxed or tax free depending on how much is crystalised.
Any remaining after the second death is paid out less 55%, assuming no remaining beneficiaries elegible for drawdown. Depending on your circumstances, you might still prefer that residue to be paid into trust.

I am still in the process to talking to the IFA about setting up the trust, but my understanding is that any lump-sum death benefits, after first or second death, can be paid into trust.

gadgetmind

Agreed, but I can't see any way to keep crystalised pots out of your estate on death. I must be missing something. Or are you saying it can be taxed and then paid as a death benefit into a bypass trust?