Defined benefit scheme and reduced life expectancy

HappyHarry

To simplify a little:

If a transfer of CETV from a DB plan to a SIPP takes place when the applicant is in poor health, and the applicant dies within two years of transfer, then some the "death benefit" value of the plan will be liable to inheritance tax, and there is no spouses exemption.

The "death benefit" value of the plan is quite complex, but is effectively the value that someone might pay for the plan on the understanding they would get the remainder on death.

PeacefulWaters

Malthusian wrote: »

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.

His view is that there is an IHT liability and my executor should complete form 409.

jamesd

Malthusian wrote: »

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).

HMRC's view appears to be that any trust before the transfer is eliminated by the transfer, then the new pension scheme is creating a new trust, with some of the value of the pension pot - the expected remainder on death - treated as the CGT liable portion.

This doesn't change the likely best course in the current situation, at least not at the big picture DB to DC transfer aspect.

HappyHarry

PeacefulWaters wrote: »

His view is that there is an IHT liability and my executor should complete form 409.

I agree with your IFA.

As jamesd says in his post above, this shouldn't necessarily change your course of action. It is just something that you need to be aware of.

PeacefulWaters

HappyHarry wrote: »

I agree with your IFA.

As jamesd says in his post above, this shouldn't necessarily change your course of action. It is just something that you need to be aware of.

Numbers are yet to be confirmed, but assuming early death doing nothing generates a dependent pension of c£8k a year for three years.

Completing the transaction creates a c£600k pot and c£140k of IHT liability unless I survive two years.

Plus death in service of £170k if I go before the end of May - no IHT liability on that figure.

I'm actually scheduled for redundancy on 31st May which will provide £86k before tax but cost me death in service benefit.

So if I survive I'll have enough savings to see me through to 55 when I can choose to play with my pension.

In other words, if I benefit from a health miracle I'm good. If the illness takes its expected course I can give my kids a great financial boost without it being enough to stop them working.

And the state gets £140k which I'm sure will be invested wisely in the future of the nation.

jamesd

Surviving two years doesn't eliminate the liability. HMRC can ask if you knew you were in ill health beyond the two year timeframe. Two years is just what they may presume means not in ill health.

Either way if the negative result happens your family ends up better off financially.