Articles - Tax planning for a great grandmother


Our late sovereign passed away as a great grandmother with 4 children, 8 grandchildren and 12 great grandchildren. Unlike the rest of us, the Queen’s agreement to pay income and capital gains tax was entirely voluntary, but the 4-generation family is becoming more and more common as the number of octogenarians and nonagenarians continues to increase, creating an opportunity to think beyond the traditional options of paying pension death benefits exclusively to spouses and children.

 By Fiona Tait, Technical Director, Intelligent Pensions

 Surviving spouses
 Most people, quite naturally, want to ensure that their spouse is looked after following their death and it is not uncommon for the entire estate to be left to their other half. This makes perfect sense from an inheritance tax point of view, but it is less clear cut for pension funds which generally do not form part of the deceased’s estate. If the pension fund is paid out to the spouse as a lump sum, it simply ensures that the previously exempt asset is brought under the inherence tax regime on second death.

 Paying the death benefits to the next generation would also increase the value of their estates however there may be scope to share the fund between more than one family member, and there should also be a much longer timescale to plan for future IHT.

 Where a spouse requires an income of their own, this may be paid under beneficiaries’ drawdown and a new set of beneficiaries may then be nominated to receive any remaining funds under discretionary disposal on second death. Spousal bypass trusts are generally unnecessary, and it is worth noting that the tax charge once the member passes age 75, could be higher than the amount that would be paid by the beneficiaries under a nominees’ drawdown plan, particularly if the next set of beneficiaries do not have an immediate need to spend the funds. This would have to be weighed against any uncertainties regarding the potential beneficiaries of the inheriting spouse, as a bypass trust may still be useful to ensure that the inherited benefits remain with the originator’s descendants.

 Children
 On the one hand adult children are likely to still be in employment and paying the highest rates of income tax, on the other they may be the generation most likely to be impacted by the shift from defined benefit to defined contribution pensions. While it true that the death benefit options are improved under defined contribution plans the greater truth is that defined contribution savings are in nearly all cases insufficient to provide the level of benefits that would be paid under a defined benefit scheme. Arranging for adult children to receive any pension death benefits via a defined contribution arrangement could go some way towards addressing the savings shortfall faced by so many of the ‘squeezed middle’ generation.

 The tax treatment of inherited pension benefits is of course extremely favourable while the original member is still under age 75 and it may still be the best option after this date, depending on whether the IHT charge on the consolidated estate is likely to exceed the amount of tax due on an inherited pension fund. Death benefit nominations should be regularly reviewed, but especially when the client is in sight of their 75th birthday. At that point it would be very easy to alter the nominated beneficiaries and distribute them to family members who would pay lower rates of tax.

 Grandchildren and great grandchildren
 Younger family members most likely pay less tax than their seniors and would receive a bigger net payment than their parents, who may also have IHT planning issues of their own.

 In addition, grandchildren in their 20s and 30s could have immediate needs of their own, such as getting onto the property ladder, or funding school fees. A pension legacy could make the funds become available sooner, and more tax-efficiently, than if they are passed on through the intermediate generation. The Residence Nil Rate Band would also apply if the main residence is left to grandchildren who qualify as direct descendants.

 Keeping the options open
 Regardless of who they are, any nominated beneficiaries have the option of setting up a beneficiary plan in their own name and thereby preserving the fund outside of their own estate. This allows them to access the benefits only when and if they are required, and thereby manage the income tax charge. Furthermore, it means that the decision about who ultimately benefits from the plan may be continually updated as the family’s circumstances change. Finally, it ensures that the funds may be kept out of the family’s individual estates and could be passed on to a succession of beneficiaries until it runs out.

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