Pension protection trusts – a safe haven for pension death benefits?

30 August, 2018

For many, pension savings represent one of our most significant assets, second only to our homes.

A 2018 study by the insurer Royal London found that the average person needs a pension pot of around £260,000 to retire comfortably. Some of us may choose to invest much more, taking advantage of the £1,030,000 lifetime allowance.

With auto-enrolment minimum pension contributions set to rise to 8% by 2020, a significant proportion of our lifetime earnings will be invested in pensions.

What is a pension protection trust (PPT)?

Pension protection trusts (PPTs) can be created at any point during your lifetime. Once set up, they remain dormant until required.

After your death the PPT receives the lump sum from your pension, instead of this passing direct to your spouse or any other named beneficiary.  While pension death benefits usually pass free of inheritance tax (IHT), without a PPT, when the recipient of the lump sum dies there could be an inheritance tax bill of 40% on whatever is still held by them.

An alternative, if your pension provider offers it, is to use the new pension rules to leave a drawdown fund for your beneficiaries.  However, a PPT may offer more protection and flexibility. 

Why set up a PPT?

Asset protection

PPTs give you increased control over how your pension pot passes to future generations. You can choose trustees to hold funds for your children and grandchildren until they are old enough to inherit. Assets retained in the trust may be shielded from divorce proceedings, bankruptcy or the remarriage of your spouse.

Assets held in the trust will also be excluded from a local authority’s assessment of your spouse’s ability to pay for care, allowing them to take full advantage of any available grants. Your trustees may still make funds available if these grants are not sufficient to cover care costs.

Tax efficiency

By putting the lump sum into the trust, the funds remain outside your spouse’s estate for IHT purposes. Capital can be loaned to your spouse interest free with payment due back to the trust on their death, preserving the funds for your children and reducing the amount of IHT payable on your spouse’s death.

Although there will be a tax charge if you die over 75, this can be reclaimed if payments are made out of the trust to beneficiaries.

Flexibility

After your death, the trustees can review the circumstances and decide whether to retain the trust or to distribute the assets in order to limit potential ongoing inheritance tax liabilities.

PPTs allow you to nominate a number of potential beneficiaries, such as your spouse, children and grandchildren.  The trustees will be able to take account of all the beneficiaries’ circumstances at the time when the money is available before distributing the trust assets or paying out income.

Conclusion

A pension protection trust should be seriously considered as a suitable way of passing your pension to future generations. If you would like more information on PPTs, please contact Jessica Jamieson on 01892 506 019 or jessica.jamieson@crippspg.co.uk.