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Pros and cons of a bypass trust

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

2) Potentially greater protection in terms of safeguarding capital for the member’s intended beneficiaries in the event of the death, divorce or bankruptcy of the intended beneficiary.

While these advantages are especially pertinent to the member, Ms Kneen says there is also an opportunity for the financial adviser to offer investment advice to the trustees and beneficiaries who receive these benefits.

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The flip side

In terms of the downside, Ms Kneen says the payment of the death benefits to the trustees still relies on the discretion of the pension administrator, meaning it remains subject to their right to refuse payment in certain circumstances

However she points out the scheme administrator will carefully heed the wishes of the member.

Ms Kneen adds a ‘carve out’ trust is not generally advisable in cases where the member is in poor health, as the assignment of the death benefits may have a significant value for inheritance tax potentially resulting in a tax charge on the member if they were to die within two years.

She says the member must fully understand the implications of setting up a bypass trust to ensure that it is fit for purpose given their personal and family circumstances and that ultimately it meets the member’s objectives.

Ms Kneen says: “This is especially true given that these trusts are usually written on an irrevocable basis.”

While a bypass trust is a very flexible way for a spouse to have access to income as and when they need it, Claire Trott, head of technical support at Talbot & Muir, points out it will however be subject to periodic charges every 10 years.

When this 10-year period starts will depend on the way in which the trust is established and where the funds are paid from on death. If they come from a trust based pension scheme then Ms Trott says the period is calculated from the date the original pension scheme is joined.

If it isn’t a trust-based pension scheme, then Ms Trott says it is calculated from the date the funds are paid into the trust.

Paul Evans, pension technical manager of Suffolk Life, adds that bypass trusts are likely to form part of a client’s wider succession planning and it is recommended that legal advice is taken when arranging bypass trusts in order to ensure that they fit into a client’s overall plans.

He says this can make the trust expensive to establish.

Additionally, Mr Evans says the trust will need to be reviewed periodically to ensure it reflects the clients’ circumstances and preferences, resulting in additional costs.

He adds: “The client will need to be in good health at the time the trust is established.