Defined benefit scheme and reduced life expectancy

Finst

Many DB schemes have an option where you can convert it into a lump sum (as cash, not a transfer to another scheme) if you have a life expectancy of less than 1 year.

The generosity of the conversion terms vary massively (from around 5 x pension to full transfer value), but if the conversion terms are good or you want some of the cash now (bucket list?) this can be a very good option.

Need to think about inheritance tax as well, as it would be taxable if over IHT limits.

Good luck!

Silvertabby

“ It depends on the pension scheme. The LGPS, for example, pays a tax free lump sum of 3 x salary in addition to any spouse/child pension. However, this wouldn't be payable if the member had opted out of the pension scheme in order to transfer their benefits to another scheme, even if they were still employed /working at the date of death.
Originally posted by Silvertabby ”
But there is nothing to stop someone rejoining the LGPS after having opted out (and possibly transferring out) so getting the life cover. The only risk would be the minimum one month gap between opting out and rejoining.

Can't see it being done in just one month.

1. Member tells employer she/he wants to opt out. Employer informs Pensions of opt out date and final pay details (after that month's pay run has been finalised). Mininum 2 months.
2. IFA requests CETV, 1 month
3. IFA considers members options and works out his/her cut. Who know how long.
4. Transfer request received and processed. 1 month.

Yes, these time scales may be shorter, but 1 month overall for an opt-out is unrealistic.

PeacefulWaters

Thanks everybody for the added bits of clarity.

PeacefulWaters

This is all very real now and I have an appointment on Tuesday.

The confirmation letter states:

"Two issues we will have to research for you are your Death in Service Benefits from the Employer and also the Inheritance Tax implications of the transfer of your benefits. There have been recent cases where HMRC had attacked transfers where the member has died within two years of the transfer and the reason for the transfer was to put their estate into a better financial position."

Death in service is unaffected. The IHT thing is a surprise.

https://www.ftadviser.com/Articles/2016/10/07/HMRC-denies-IHT-pension-transfer-loophole-exists

Silvertabby

This is all very real now and I have an appointment on Tuesday.

The confirmation letter states:

"Two issues we will have to research for you are your Death in Service Benefits from the Employer and also the Inheritance Tax implications of the transfer of your benefits. There have been recent cases where HMRC had attacked transfers where the member has died within two years of the transfer and the reason for the transfer was to put their estate into a better financial position."

Death in service is unaffected. The IHT thing is a surprise.

https://www.ftadviser.com/Articles/2016/10/07/HMRC-denies-IHT-pension-transfer-loophole-exists

I'm so sorry that your news isn't good. I do hope that your letter refers to the worst possible scenario, and that things improve for you.

Just a thought, but which pension scheme are you in? With the exception of the LGPS, public sector pension funds can no longer be transferred to private schemes/SIPPs. The valuation you referred to is for divorce purposes only, and wouldn't necessarily be an actual transfer value.

PeacefulWaters

Silvertabby wrote: »

I'm so sorry that your news isn't good. I do hope that your letter refers to the worst possible scenario, and that things improve for you.

Just a thought, but which pension scheme are you in? With the exception of the LGPS, public sector pension funds can no longer be transferred to private schemes/SIPPs. The valuation you referred to is for divorce purposes only, and wouldn't necessarily be an actual transfer value.

It's a private scheme.

Malthusian

PeacefulWaters wrote: »

There have been recent cases where HMRC had attacked transfers where the member has died within two years of the transfer and the reason for the transfer was to put their estate into a better financial position.

I'd like to know exactly what these cases involved. The FT Adviser article is long on speculation and short on evidence.

The relevant section of the HMRC manual talks about transfers where there is a loss to your estate. Well, if you transfer out of most DB pensions where the death benefit would be a widow's or survivor's pension, which is not subject to Inheritance Tax, and you transfer to a personal pension where the death benefit is a lump sum paid at the insurer's discretion (IHTM17014 specifically acknowledges that IHT isn't chargeable if the payment is discretionary), the loss to the estate is 0 - 0 = 0.

The impression I get is that there are circumstances where IHT may be charged but very specific circumstances which depend on the pension scheme. As I know nothing about the pension scheme you're in I'll leave your IFA to work it out.

PensionTech

There's another article on it here:

https://www.moneymarketing.co.uk/issues/27-october-2016/whats-iht-position-final-salary-transfers/

That doesn't provide much more information, but it does say, "However, by transferring, the individual has the power to determine the payment of death benefits. HM Revenue & Customs believes this right has value because the member could direct payment to their own estate – however unlikely it is."

I'm not sure that works though. My background is trust-based rather than contract-based schemes so I'm not 100% on this, but is a contract-based arrangement actually obliged to follow the member's direction? If not, it seems to me that the member's direction is a preference rather than a right and therefore has no value for IHT purposes. Anyone know more about this?

Edit: I've found an example expression of wish form from Aviva for personal and stakeholder pensions, and it clearly says the member's nomination is not binding on the provider, as I would expect. Therefore I really don't think HMRC could use the argument put forward in the Money Marketing article, if indeed that is what they are relying upon.

PeacefulWaters

Here's the text of a document my IFA just sent me:

What does an IHT 409 tell us about pension death benefit planning?
The following article was prompted by a recent request to assist an adviser with the completion of an IHT 409 following the death of a client. What is an IHT 409 and what is its significance in financial planning?
When executors or personal representatives are dealing with the estate of the deceased one of their key responsibilities is the completion and submission of the appropriate HMRC IHT forms. An IHT400 (full IHT return) is required when there is Inheritance Tax to pay or the deceased's estate does not qualify as an "excepted estate" i.e. it is over the nil rate band or where there is no tax to pay because of the spouse exemption but the estate is valued at over £1 million. As well as completing IHT 400 a number of additional schedules and form IHT 421 (for probate purposes) will also need to be completed.
IHT 409
An IHT 409 is the schedule that deals with the IHT treatment of any pension arrangement which the deceased held at the date of death. Does an executor know how to complete this form and what key lifetime planning issues does it raise?
Importantly, the questions that are asked on the schedule highlight some client scenarios where IHT may be payable from a pension death benefit. This could, therefore, assist a financial planner when trying to maximise pension death benefits for a client's beneficiaries by taking this into account in advance and planning appropriately. Consider the following questions from the schedule with regard to the payment of a lump sum death benefit i.e. from an uncrystallised fund;
Lump Sum Benefit
12. Was it at the trustees' discretion to choose who should receive the lump sum?
The pension fund needs to be paid at the discretion of the trustees for it to be free of IHT. As retirement annuities and S32 buy out contracts are not trust based pension arrangements, there is no trustee discretion with regard to the payment of a lump sum death benefit and it will be added to the deceased's estate and therefore be potentially liable to IHT. The key action here, therefore, would be to write such policies in trust before it is too late.
So, does this mean that as long as the pension benefits are paid at the discretion of the trustees they are never included in the estate for IHT purposes ....or are they?
Transfer of and changes to pension benefits
17. Did the deceased, within the two years before they died, transfer or dispose of any benefits payable under a pension scheme or personal pension policy?
18. Did the deceased, within the two years before they died, make any changes to the benefits to which they were entitled under a pension scheme or personal pension policy?
If the deceased transferred pension benefits, made a nomination, appointment or assignment or made any changes to the pension benefits in the two years before they died, there may be a liability to IHT, specifically if they were knowingly in poor health at the time.
Pension Transfer
A pension transfer is treated by HMRC as bringing to an end any trust that applies to death benefits – http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM17072.htm. A transfer of value occurs to the trust of the new pension plan. In most cases this is only applicable where the member dies within two years of the transfer and, at date of transfer, the member was in serious ill health. The word of warning, therefore, is to exercise caution when considering a transfer of pension benefits where the member is in ill health and IHT is an issue!
Writing an existing Pension Plan in trust
What about the impact of writing an existing pension plan in trust if in ill health? It is possible to establish a pilot trust to receive death benefits, even whilst in ill health, without the amount being caught by the lifetime transfer rules which would catch an integrated trust. This is because the pilot trust is only ever a revoccable option, via an expression of wish, at the discretion of the trustees.
IHTM17071 - Pensions: IHT charges: assignment of death benefits
The right to a death benefit from a pension scheme is often transferred irrevocably to a discretionary trust. Many pension providers have a standard document, known as an integrated trust (or trust of the policy) to put this into effect. This type of transfer or assignment is a lifetime transfer at the date of transfer and can result in a lifetime transfer of value if the scheme member is in ill-health at the time. Not all cases though involve irrevocable transfers. Where a trust is:
· only one of the potential beneficiaries, even if nominated in a letter of wishes, and
· the pension provider retains the right to make a payment at its discretion
there is no lifetime transfer.
Details of any assignment of death benefits within the 2 years before a death should be included on form IHT409
Contributions to a pension scheme within two years of death
22. Did the deceased or the deceased's employer make any contributions to a pension scheme within the two years before the date of death?
Contributions to a pension scheme by the scheme member or their employer may be a transfer of value (gift) if the contributions are made when the member is in ill health.
Summary
Although not an exhaustive list the IHT 409 provides the following clues with regard to advising a client during lifetime with the objective of maximising IHT free death benefits under a pension arrangement, namely;
· Where a pension arrangement does not have discretionary powers to pay lump sum death benefits (Retirement Annuity/S32) write it under an appropriate trust
· Write the pension plan under an appropriate discretionary trust as soon as possible i.e. before the client is in poor health
· If a client is already in poor health use a pilot trust via an expression of wish (revocable nomination) rather than an integrated trust (irrevocable nomination)
· Caution when considering a transfer of and changes to pension benefits where the member is in serious ill health and IHT is an issue
· Caution when considering the payment of contributions when the member in serious ill health
Based on the above the value of pension benefits could be included in the estate for IHT purposes – even if the trustees are using their discretionary powers! Planning ahead and taking appropriate action or caveating recommendations could be very important. Understanding the issues will also help executors to complete the IHT 409, if appropriate.

Malthusian

I'm not seeing which part of that is relevant to someone who is transferring a DB scheme (benefits payable to estate = £0*) to a trust-based DC scheme where the trustees have discretion over death benefits (benefits payable to estate = £0).

Has your IFA ventured any actual opinion on whether there is an IHT issue here or is he just sending you long walls of text?

*something of an assumption made there, but for typical DB schemes, death benefits before retirement consist of a pension for widows or young children, so nothing payable to the member's estate.