Another reason could be in relation to care. If a spouse received a dependant’s drawdown and then ended up in long term care then the drawdown would be considered by the local authority in the same way that the member’s drawdown would be. This would not happen if the money was in trust.
Death benefits are usually income tax free (but may be subject to the lifetime allowance tax charge) when paid to an individual or non-individual, if the current holder of the benefits is aged less than 75 and the benefits are paid within two years of the scheme administrator becoming aware of the death. Between 6 April 2015 and 5 April 2016, a SBT may not have been a good idea post-75 as lump sums were taxed at 45 per cent irrespective of the recipient.
Since 6 April 2016, post-75 payments to individuals are taxed at their marginal rate of tax but payments to a non-individual, including a trust, are taxed at the special lump sum death benefit charge of 45 per cent. Although the scheme administrator would deduct the 45 per cent tax, a payment of lump sum death benefit to a trust then to a beneficiary is treated as income of that beneficiary, net of a reclaimable 45 per cent tax credit.
Although it looks like the eventual beneficiary will be broadly in the same position if they had received a lump sum from the pension scheme directly or through a trust, there may be some differences. A SBT is a discretionary trust, so may be subject to periodic charges every 10 years, and exit charges when any money is distributed. In addition, once a lump sum is paid out of the scheme, the deduction of the 45 per cent tax will limit any profit/loss from the pension fund, as less will be invested and it may not be as tax efficient. But if control is important to the member then it may be worth it.
Defined benefit transfers
There has been a huge increase in the amount of DB transfers, often clients will say that this is because they want flexibility of death benefits. Consideration of the advantages and disadvantages of DB transfer can only be dealt with on a case-by-case basis. However, this alone should not be a reason for transfer, especially if the member will need their pension in retirement and it is their only asset. If death benefits are important, the required capital value on death could be provided via another method such as life cover. The cost of life cover may be worth it to retain valuable DB scheme guarantees.
