Where the client has concerns over what happens to the fund after their death, Paul Evans, pension technical manager of Suffolk Life, says a bypass trust should be considered.
He says: “They may wish the appointed trustees to support a loved one who struggles to manage their own financial affairs, by passing on instructions on how the monies should be used.
“The spouse may have children from a previous relationship and the client wishes to ensure that the funds or assets held in their pension are passed on to their children alone.
“The trust will allow the client to nominate their choice of beneficiaries while permitting the trustees to continue to make payments to the spouse.”
The bypass trust has been particularly suitable for high net worth individuals and their spouse or civil partner, says Claire Trott, head of technical support at Talbot & Muir.
Ms Trott says spouses of high net worth individuals may also be a high net worth individual, especially after inheriting.
She says a thing for advisers to note is the inheritance tax treatment of bypass trusts is complex.
While the bypass trust holds a purely nominal sum then no inheritance tax liability will arise. However, in the event of the bypass trust receiving a pension death benefit lump sum then Ms Trott says the trustees should take advice at that point regarding the inheritance tax treatment.
Despite the flexibility and tax advantages of the bypass trust, Ms Trott says the member may still prefer in some cases the freedom to nominate beneficiaries directly.
She says this will become more popular with the changes to the death benefit options proposed for April 2015, which remove any spectre of 55 per cent taxes on inherited pensions, even where they are passed down multiple generations.
Danny Cox, head of financial planning at Bristol-based Hargreaves Lansdown, says typically a trust is of most use for cases where death benefits are paid before April 2015, there are both uncrystallised benefits and the surviving spouse has a pressing inheritance tax problem.
Spousal bypass trusts are less attractive for crystallised benefits as the lump sum is already taxed at 55 per cent, Mr Cox points out.
However, Mr Cox says the trust may still be occasionally beneficial for crystallised rights where the spouse has a low life expectancy.
He says advisers should remember that bypass trusts have no inheritance tax value where the spouse’s estate combined with pension death benefits is less than the nil rate band.
