Should you put your personal pension into trust?
Due to the changes in pensions and trusts legislation, over the last few years, it is much less clear cut whether or not to make a death benefit nomination to put your personal pension into trust.
Prior to these legislative changes life was very simple. If you had a personal pension it was often advisable to put it into trust for bloodline protection for your spouse and children/grandchildren. Likewise with pension death benefits from final salary pension schemes: in other words pension life insurance.
However things have been turned upside down in recent years by ill-thought out legislative changes to pensions and trusts, which now make it extremely difficult in certain cases to decide whether or not to put personal pensions into trust.
In April 2015 George Osborne, the Chancellor of the Exchequer at the time, introduced so-called Pensions Freedoms. One of the results of which was that personal pensions became Inheritance Tax free not only for the personal pension account holder, but also for their spouse and descendants forever. What’s more, if you die before age 75 your personal pension can be accessed by your beneficiaries and their descendants totally tax-free forever. Furthermore, the inheritance of a personal pension does not add to your Lifetime Allowance, currently £1.055.000, under which punitive extra tax charges would otherwise apply.
Given these huge tax advantages to personal pension account holders there appears to be little advantage in putting personal pensions into trust. You see the problem with doing so is that your personal pension is then transferred from a tax-free pot into a fully taxable one. The real killer though is the tax sting after you reach the age of 75. If you then die and your personal pension goes into trust, not only you convert it from a tax-free plan into a taxable one, but you also incur a 45% Income Tax charge! So, for the vast majority of personal pension owners it is advisable not to put your pension into trust after age 75.
In my opinion it is generally inadvisable to put your pension into trust before age 75 too, other than for bloodline protection purposes. Personally, I do not consider it to be bloodline protection to remove your personal pension from a tax-free environment into a taxable one which is potentially subject to a 45% tax charge one day. How can such a damaging tax outcome be considered bloodline protection at all? A personal pension subject to high tax charges isn’t a vehicle for bloodline protection at all. Quite the opposite in fact. Pretty much the only people advocating such an approach are Will writers who make their money from selling Wills and trusts. A somewhat biased approach I would suggest and one that does you few, if any, favours.
The beauty of personal pensions is that once you have retired and put your pension into Income Drawdown your surviving spouse can literally step into your shoes and continue to receive the same level of pension as you were receiving prior to your death. That is in effect a 100% widow’s/widower’s pension. What’s more your spouse inherits your Income Drawdown plan IHT free and its value doesn’t count towards their Lifetime Allowance. Most important of all is the fact that your personal pension remains in a tax-free environment after your death. Now that’s what I call bloodline protection!
So the next time someone tries to talk you into putting your personal pension into trust do ask them to justify their recommendations bearing in mind the many disadvantages of doing so for you personally.
If you would like bespoke advice on whether or not to put your personal pension into trust why not contact us to find out? You know it makes sense.