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Alternatives to a bypass trust

This article is part of
Guide to Bypass Trusts and Pension Freedoms

Where clients want to retain control of their lump sum after they have died, Paul Evans, pension technical manager of Suffolk Life, says the fund can be apportioned between multiple dependents, for example of the value to the spouse and the remainder distributed between other dependents.

In this way, Mr Evans says only a limited portion can be potentially be passed outside of the settlor’s own wishes or remain outside their own nominations.

From April 2015, Danny Cox, head of financial planning at Bristol-based Hargreaves Lansdown, says a spouse who inherits death benefits as beneficiary’s drawdown effectively has a readymade spousal bypass trust.

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Mr Cox says: “There will be no restriction on how quickly they can draw income and on their subsequent death any remaining fund could be passed on to a successor beneficiary free of inheritance tax.

“Investors should ensure they have provided an up to date expression of wish or nomination to the trustees of their pension scheme.

“The pension scheme trustees have discretion over who receives death benefits, however scheme rules may prevent some classes of beneficiary from being considered unless they have been nominated.

“Where pension scheme trustees use their discretion to pay to a bypass trust this does then give control to the trustees, although it may also result in periodic inheritance tax charges in the future.”

What is without question is that pensions are becoming more important as potential estate planning tools, says Tracyann Kneen, tax and trusts technical manager at James Hay Partnership.

She says: “The pension freedoms set to be brought in provide an opportunity for advisers to now start a discussion with their clients on their estate planning strategy ensuring that any arrangements whether including a trust or not will meet the client’s objectives.”