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Don’t get caught out by changes to trusts

Financial advisers should review whether a trust linked to death benefits from pensions is the best option for clients following recent changes in the law, according to Paul Cadde.

Under the new rules, a pension pot owner under the age of 75 can pass on the value of his savings to an elected beneficiary, including spousal bypass trusts, without a tax charge.

The value paid into a trust will go in as cash, and is therefore subject to taxation if any income or capital is made on the asset.

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Mr Cadde, founder of Hampshire-based Adviser Breakthrough Solution, which offers coaching to financial planners, said that inheritance tax may be applicable, depending on the amount of money in the trust, as well as periodic charges every 10 years and an exit fee if the beneficiaries withdraw the money.

He added: “You may be able to reduce some of those tax bills by appointing income to the beneficiaries. But unless the beneficiaries have little or no other taxable income and the income is under the personal allowance there will still be some tax for them to pay.

“So do not simply focus on the fact that the money is tax-free when it is first received. Look at the overall tax picture.”

On the other hand, the value of a pension paid directly to an individual is treated as a pension, and is therefore free from income and capital gains tax, while money withdrawn is tax-free.

Mr Cadde said that financial advisers could leave themselves open to complaints and compensation claims from clients – including those who may have been set up with spousal trusts by someone else – if they do not clearly present the options available to them under the new rules.

However, there may be cases whereby paying the value of a pension into a trust is recommendable – if, for example, the spouse is in a nursing home, according to Mr Cadde.

He said: “The answer, therefore, is that your clients need flexibility. they need a way for the pension to pass to the spouse under normal circumstances but into a trust if the circumstances warrant.

“This pretty much comes down to the way the ‘nomination of beneficiary’ form is worded, and the in-depth understanding of the issues by the professional trustee you use with the pension death benefit trust.

“Ideally you would want to use the services of a solicitor very familiar with these issues.”

Phil O’Connor, director at Greater Manchester-based Whitewell Financial Planning, said: “I think using the nomination of benefits is the right way to go. There will be situations where you need to consider using a trust – such as where you want to narrow down the number of beneficiaries.

“The proactive advisers would have informed their clients of the changes. I think there has to be an element of responsibility taken by the client also. Advisers who do not inform their clients leave themselves open to challenge. That is simply the world we live in.”