Pension lump sum and Inheritance Tax(IHT)

Cardew

Someone I know in his early 50’s has incurable terminal cancer. He has never been married and has no dependants. After graduating from university he worked for a major British firm for approx. 20 years and has a pension of approx. £16k payable at age 60. His assets – mainly his house – comfortably exceed the £325k allowance for IHT. His intention is to leave everything to his younger brother; I don’t know if he has yet completed a Will to that effect.

He has applied under the serious ill health provision of his pension plan for life commutation of this pension and approval is considered a formality; he will never work again. His reading of his pension plan states that as the payment of any sum is discretionary, it is exempt IHT.

I am unclear how this provision to be exempt IHT works. If it is paid to his estate, surely it cannot be ‘ring-fenced’ and if he were to ask for it to be paid directly to his brother would it not count as a gift?

Similarly he has a SIPP which states that it is exempt IHT.

Obviously I have advised him to see a IFA and/or a solicitor asap.
Can anyone please advise on the IHT aspects?

hyubh

Cardew wrote: »

I am unclear how this provision to be exempt IHT works. If it is paid to his estate, surely it cannot be ‘ring-fenced’ and if he were to ask for it to be paid directly to his brother would it not count as a gift?

The key is, the death grant is at the discretion of the trustees (or administering authority or scheme manager as applicable in a public sector scheme), i.e. it is not formally in the gift of the deceased. Hence the modern lingo of an 'expression of wish' form for what used to be called a death grant nomination.

Conversely, were there to be an unusual situation of the pension holder being able to direct the trustees, then IHT would come into play. Also, leaving it with the estate (in the normal situation) would be the last choice for the reason you give.

Marcon

hyubh wrote: »

The key is, the death grant is at the discretion of the trustees (or administering authority or scheme manager as applicable in a public sector scheme), i.e. it is not formally in the gift of the deceased. Hence the modern lingo of an 'expression of wish' form for what used to be called a death grant nomination.

From what OP says this isn't a death grant: it is total commutation of a pension which is not yet in payment, on the grounds of serious ill health ('serious' in this context meaning the scheme member has a life expectancy of less than a year and a recognised medical professional has confirmed this in writing to the trustees).

Although total commutation is at the discretion of the trustees, in this situation it does NOT mean it is free of IHT; it means free of income or capital gains tax in the hands of the member (a commuted pension can't be paid to someone else).

Transferring out to a DC arrangement may be a better option (almost certainly more money, and that could possibly be left tax free to his brother), but he needs advice from an IFA very urgently indeed, before doing anything.

Cardew

He is not thinking of a payment from the pension fund on his death. As he has a short life expectancy - perhaps only months - he will be getting a one-off payment from the fund whilst he is still alive.

atush

If he doesnt need the money, and wants to leave it to his brother- he should follow post 3. Ask urgently for a transfer valuation, and help him find a pension transfer specialist asap.

He can transfer his DB pension into a DC pension which will then outlast him.

Cardew

Marcon wrote: »

From what OP says this isn't a death grant: it is total commutation of a pension which is not yet in payment, on the grounds of serious ill health ('serious' in this context meaning the scheme member has a life expectancy of less than a year and a recognised medical professional has confirmed this in writing to the trustees).

Although total commutation is at the discretion of the trustees, in this situation it does NOT mean it is free of IHT; it means free of income or capital gains tax in the hands of the member.

Transferring out to a DC arrangement may be a better option (almost certainly more money, and that could be left tax free to his brother), but he needs advice from an IFA very urgently indeed, before doing anything.

Thanks. As you state your definition of serious ill health has been certified by the company's health assessment company and passed to the trustees.

What does 'DC arrangement' mean please.

Edit. Also DB pension.

Marcon

DB - defined benefit (his current type of scheme).

DC - defined contribution.

Advice from an IFA is very urgent indeed. Your friend also needs to be made aware of the potential tax consequences where someone in his position transfers from a DB to a DC scheme knowing they are seriously ill and then (sadly) dies - one for the IFA to cover, rather than trying to go into it here.

Albermarle

What does 'DC arrangement' mean please

I agree with the others that professional advice is needed for this situation.
However if you want an answer to your question have a look at these links.
https://www.pensionsadvisoryservice.org.uk/about-pensions/pensions-basics
https://www.moneysavingexpert.com/pensions/

jamesd

Cardew wrote: »

He has applied under the serious ill health provision of his pension plan for life commutation of this pension and approval is considered a formality; he will never work again.

It's vital that he does't just take the life commutation offer. The financial loss could be large. If he's applied to take it without knowing the amount he should urgently seek to reverse that and get the amount first.

Instead, he should compare the commutation value to the cash equivalent transfer value (CETV) that he'd get if he instead transferred to a normal defined contribution pension.

Normal defined benefit commutation tends to pay only about half of what a CETV would be but it varies by scheme situation and age. A private sector CETV could typically exceed thirty times the annual income at the moment.

If you look around you'll find lots of writing asserting that transfers from a defined benefit pension can be a bad idea. That doesn't apply to his situation.

Cardew wrote: »

His reading of his pension plan states that as the payment of any sum is discretionary, it is exempt IHT.

I am unclear how this provision to be exempt IHT works. If it is paid to his estate, surely it cannot be ‘ring-fenced’ and if he were to ask for it to be paid directly to his brother would it not count as a gift?

No IHT when it's paid directly to him because he's not dead yet. No IHT if it's paid to specified beneficiaries after his death.

Cardew wrote: »

Similarly he has a SIPP which states that it is exempt IHT.

Provided he's had it for at least two years before death that's true.

For a personal pension including any money transferred into his existing one these are the benefits:

1. Any amount can be taken out tax free as a "serious ill health lump sum" at any age while still alive provided doctors say life expectancy is no more than twelve months. No 25% or age 55 restriction.

2. For death before age 75 those it's left to by an expression of wishes get a "beneficiary pension" that they can withdraw any portion out of tax free whenever they like. No 25% or age 55 restriction. In effect it's a super-ISA and even a toddler can take money out.

3. The amount being withdrawn isn't a pension commencement lump sum (the usual 25% from age 55) and isn't classed as flexible access so no recycling or money purchase annual allowance (reduction from 40k to 4k a year of pension contributions) issues for the recipients.

Dox

jamesd wrote: »

No IHT if it's paid to specified beneficiaries after his death.

OP, your friend really needs to get expert advice from someone who is up to speed in this area. There's a notorious case which is going to be heard by the Supreme Court for a 'final' ruling, but as yet no date has been set: https://www.moneywise.co.uk/news/2018-10-19%E2%80%8C%E2%80%8C/landmark-ruling-could-see-pension-savers-ill-health-stung-stealthy-40-inheritance

So it may not be correct to say there's no IHT in a case of this sort, as post 7 has already pointed out.

Apodemus

If the intention is to minimise that amount of tax paid across the transfer from the estate to the beneficiaries, presumably they may need to take account of the tax position of the beneficiaries as well. There is no point avoiding IHT if the beneficiaries end up paying as much, or more, in income tax instead or it leads to them breaching their pensions life-time allowance. Complex stuff and definitely in IFA territory.