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Pensions and Spousal By-Pass Trusts
Commonly on death before pension age a lump sum becomes payable under the terms of a pension scheme. Such lump sum payments are not always payable in accordance with the terms of any Will that you leave. If that is the case it is often possible for you to give directions in advance as to how any such lump sums should be distributed.
If you are a member of an occupational pension scheme – that is a scheme run by your employer - there may be a lump sum payable on his or her death “in service” where the pension trustees have complete discretion as to whom to pay the 'death in service benefit' . Provided there is no right to make a legally binding nomination of the benefit, you should consider lodging a “Letter of Wishes” with the pension trustees explaining how you wish them to distribute any death in service benefits on your death. Usually the scheme administrators will have a form which can be completed by you and passed to them to register these. You should keep a copy of any such form with your copy of the Will, so that when reviewing your Will in future you can review the instructions you have given at the same time.
If the death in service benefit would be payable completely at the discretion of the pension fund trustees and you have no right to make a legally binding nomination of it, that death in service benefit would not, in many cases, attract Inheritance Tax on your death.
If any death in service benefit accrued to your spouse, it would then form part of his or her estate for Inheritance Tax purposes. In an endeavour to avoid the death in service benefit forming part of the estate of the spouse for Inheritance Tax purposes, it is common for the member of an occupational scheme to make arrangements for any such benefits to be paid to a “Discretionary Trust” for the benefit of his or her spouse and family. This is often arranged by setting up the recipient trust during the lifetime of the member and giving instructions in the Letter of Wishes to the pension trustees to pay the death in service benefit to that new trust. This type of trust is known as spousal by-pass trust.
For further information about spousal by-pass trusts contact our Wills and Succession Planning Team.
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