Members of defined benefit schemes who transfer out and then die within two years could be subject to hefty tax charges, The Timebank's Sean Donald has warned.
Mr Donald said if the member knows he or she is in poor health at the time of the transfer, HM Revenue & Customs may treat the transaction as a "chargeable lifetime transfer".
That means if the transfer value is more than £325,000 - that is, the current nil rate band - it will attract a 20 per cent tax.
In a note to clients, Mr Donald said it was particularly important for advisers and providers to be aware of this issue at the moment, given the surge in DB transfers since pension freedoms came into force in April 2015.
He pointed out that, if the member transfers the money into a self invested personal pension, and has no beneficiaries to pay the tax bill, responsibility falls on the Sipp provider to pay it.
Mr Donald said the onus was on financial advisers to make sure they were aware of the occasions when pensions are eligible for some sort of inheritance tax.
"There has been more than sufficient coverage in the press and with court cases over the last 10 years or so, for there being no excuse for financial advisers knowing there is the potential for IHT on pension transfers when an individual undertakes a pension transfer when they are knowingly in poor health and the individual then dies within two years," he wrote.
"If an IHT liability results, or the transfer causes the member's nil rate band to not be available or fully available on their death, there seems little point in blaming the pension scheme administrator. The fault must rest with the adviser.
"Should a complaint be made in circumstances such as these, it will be interesting as to how the outcome will be determined," he said.
Darren Cooke, a chartered financial planner with Red Circle Financial Planning, said he believed most DB transfer-qualified advisers - such as himself - were aware of the rule.
However, he said the uptick in demand since pension freedoms came in may have brought some advisers back into the DB transfer market who qualified a long time ago, and were therefore rusty on some of the rules.
He also said non-DB transfer-qualified advisers may refer their clients to DB transfer specialists without warning them of the rule for terminally ill members.
He added, though, that if clients withhold the fact that they are in poor health, then there is not much the adviser can do.
james.fernyhough@ft.com
