How to navigate inheritance tax and pensions with clients

The normal expenditure from income exemption is also a very useful exemption to use as it is unlimited. All that is required to prove it is free from IHT is evidence that it formed a pattern of giving, was made out of income and there is not a reduced standard of living for the donor because of the gift.  

If no exemption applies then the contributions are a potentially exempt transfer and the normal seven-year rule applies.

Estate is entitled to benefit or binding nomination

There are situations where there is a contractual entitlement for the estate to benefit and this would mean that IHT could be payable.

If a client has a retirement annuity contract then it will be paid to the estate unless there is a trust wrapped around it. 

Often, a client will have bought an annuity which has a guarantee period. Payments under this guarantee will either be contractually due to the estate or may be paid to someone who the client has directed to receive the payment.

Since pension freedoms and the increase in transfer values, many clients are transferring their defined benefit (DB) pensions to defined contribution (DC) arrangements.

In both situations the amount will form part of the estate. This amount can be calculated using the HM Revenue & Customs guaranteed annuity calculator or, in more complex cases, in agreement with HMRC.

In addition, if the member had the right to bind the scheme then the benefits may be subject to IHT.

This should not be confused with where a client has filled out an expression of wish form but the payment of benefits is still at trustee discretion. If there is a binding nomination it means that the scheme must pay the beneficiaries stated on the form, regardless of the circumstances.

This can be very useful when the death benefits are going to the spouse and the client is in ill health as the spouse’s exemption would apply. However, if the client has not kept their binding nomination up to date, it could mean that an ex-spouse receives the death benefits, as well as IHT potentially being paid.

Transfers

Since pension freedoms and the increase in transfer values, many clients are transferring their defined benefit (DB) pensions to defined contribution (DC) arrangements. But quite often these people are doing so in ill health.

In many cases there are no dependants, such as spouses, civil partners or children under 23, or over 23 and disabled. So, if they stayed in the DB scheme, benefits would cease on their death.

But if they transfer to a discretionary DC scheme their beneficiaries, who are often their adult children, can benefit.