The bypass trust has been rolled out to supplement the Ipswich-based provider’s self-invested personal pension offerings, with the aim of maximising the amount received by a pension member’s beneficiary by reducing the impact of IHT.
Whereas pension death benefits are usually paid free of IHT, Suffolk Life warned they could become taxable in the beneficiary’s estate for IHT purposes when that person dies, or on a lifetime transfer.
However, if an exemption, such as a bypass trust, is available, the risk of being hit with an IHT charge can be mitigated.
Bypass trusts have been used by many pension providers in the past and enable a lump sum death benefit payable from a Sipp to be paid to a trust rather than an individual.
According to Suffolk Life, nominating the trustees of the bypass trust as the recipient of the pension scheme death benefits means the fund can remain accessible without forming part of the beneficiary’s estate.
In the last full tax year, ending April 2013, £3.1bn of IHT was collected by HMRC, up from £2.9bn the year before.
With property values relatively high and the IHT threshold frozen at £325,000 until April 2019, many people are now getting taxed on assets passed over after death.
In October last year, Suffolk Life announced that the assets under administration for its Sipp had surpassed £6bn, with the average fund size exceeding £300,000.
Greg Kingston, head of marketing and proposition for Suffolk Life, said: “Providing a bypass trust complements our range of Sipps and will provide a valuable option for those advisers looking beyond a pension as solely a vehicle for an individual’s retirement. Demand has been constant but growing and we reached the conclusion that if you put two providers together and they are identical, you would take the one with the bypass trust. People are more aware of IHT now. If you look at our average pension pot, it is £300,000. If they have accumulated that much in a pension fund then IHT tax is likely to be a concern for them.”
David Gibson (left), director of County Londonderry-based Gibson Financial Planning, said: “Clients with substantial pension benefits should consider using a bypass trust to remove a significant value from a potential IHT payment on the second death. The cost of setting one up is negligible when compared to the potential savings in IHT. I am not a big fan of provider trusts and I would prefer to use a bespoke trust by a specialist firm. I actually had a quote for one of these trusts today and it was £162 + Vat, which was nothing compared to the potential to save £166,800 in IHT.”
Suffolk Life has confirmed that there are no additional charges for using this particular product.
Suffolk Life was smart to add this option to its Sipp packages. Whereas previously it advised intermediaries to seek independent advice for trusts, the fact that it now offers its own could make a difference in attracting and retaining its current client base. When considering that the firm’s average pension pot is just £25,000 below the IHT threshold, it made considerable sense to offer additional support to its clients who could otherwise have been stung by high tax charges.