Lisa Webster: Keep IHT away from pensions

As the saying goes, nothing is certain except death and taxes. When you put the two together you get inheritance tax (IHT) and in my experience of the pension world the subject of IHT is also certain to come up on a regular basis – I’ve had two queries on the subject in the last two days. You probably know that 99% of the time your clients’ pensions will not be subject to IHT, but the other 1% causes uncertainty. These usually relate to transfers in ill-health and the will-they-won’t-they debate as to whether they’ll be caught (and even when you think they will, HMRC may not bother to attempt to claim tax). Ill-health transfers and loading contributions on your death bed aside, it’s the hoops we have to jump through to keep the straightforward cases out of the IHT net that can be particularly frustrating at times. Most death benefit cases I see aren’t complex. Take a case where the deceased has completed a nomination form to leave benefits 100% to their spouse. Simple. However, like most pensions, our scheme rules give the scheme administrator discretion as to whom the benefits are paid to. This means we have to make enquiries to ensure the spouse is the most appropriate beneficiary. If we didn’t make any checks and just followed the nomination automatically, then effectively that is a binding nomination, and it would come into the IHT net. In this instance, that would not be an issue – as the spouse is the recipient and there is the spousal exemption. However, if instead of the spouse, funds were left to a child then the potential for IHT arises. And it’s not as straightforward as having binding nominations for some members, and non-binding for others. Some providers have tried that in the past but when tested there has been at least one Ombudsman ruling where, as the scheme rules stated the administrator had discretion, the perceived binding nomination was not actually binding at all. So we’re back to the point where scheme administrators have to check each case. This means checking marriage certificates, whether parties are separated or divorced, whether there are any other dependants that should be considered, and so on. All of this adds time and cost, delaying payments of death benefits when they could be needed most. And of course, adding to the stress of parties that are recently bereaved. Wouldn’t it be simpler if we could just have a carve out for pensions that meant they were always outside the estate without the need for discretion (with the only necessary exemption being for those last-minute excess contributions paid in knowledge of terminal illness)? If that was the case then we could pay out on straightforward cases with only basic checks and make the whole process less painful for all involved. Lisa Webster is senior technical consultant at AJ Bell. She is an economics graduate with over 15 years’ experience in financial services. Prior to joining AJ Bell in May 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. She is part of the AJ Bell Technical Team, responsible for providing regulatory and technical analysis to the business and outside world. Email: This email address is being protected from spambots. You need JavaScript enabled to view it. Twitter: @lisasippster

Lisa Webster: Keep IHT away from pensions

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