There are many different types of registered pension schemes and a lot of flexibility for scheme members over the timing and form of benefits that can be taken. This can make the interaction with IHT complicated.
That said, there have been a number of simplifications to inheritance tax (IHT) legislation, which means that in the main, benefits from registered pensions schemes will be exempt from an individuals estate for IHT. This article focuses on those situations where a charge to IHT may still apply.
Contributions to a member's plan
Contributions by a member to their registered pension scheme(s) (or indeed a qualifying non-UK pension scheme) will not generally be classed as a transfer of value unless, at the point of making the contribution, they were in ill health and they die within two years of making the contribution. Even then, a charge may only be considered if an established pattern of contributions over several years is altered in the knowledge that the member is not going to survive to enjoy retirement benefits — therefore enhancing the lump sum death benefit passing to the beneficiaries.
Contributions to another individual’s pension
It is possible to make a pension contribution to another person’s pension. For example, a grandparent could make a pension contribution for a grandchild. Where these contributions do not fall within the £3,000 annual gift exemption or normal expenditure out of income exemption, the contributions will constitute potentially exempt transfers.
A charge may also apply where there is a transfer of pension benefits within two years of the member’s death whilst in ill health; either by transferring from one registered pension scheme to another (or to a Qualifying Recognised Overseas Pension Scheme (QROPS)), or by transferring their death benefits to a trust.
Payments made to the Legal Personal Representatives
If payment of a lump sum death benefit is made to the legal personal representative through the discretionary powers of the trustees, or the scheme administrator, where the scheme has no trustees, then the value of the benefit will not normally be included in the estate for IHT purposes. The only exception is where there are no other potential beneficiaries, in which case no actual discretion is being exercised.
Lump sums payable as of right to the legal personal representatives will form part of the estate for IHT purposes. This is generally the case for Retirement Annuity Contracts or Section 32 plans, not subject to a declaration of trust.
Remaining payments under a guaranteed period
An interest in a pension or annuity that ends on the member's death shall not be taken into account in determining the value of the estate (section 151 IHTA 1984). This means the capital value that could have been placed on the pension at date of death is ignored.
However, where the pension is subject to a guaranteed period (which could be up to 10 years) the capital value of any remaining payments, if payable as of right to the legal personal representatives, will form part of the estate for IHT. If the remaining payments are payable at the discretion of the trustees or scheme administrators, no IHT charge will arise. This HMRC calculator can be used to estimate the value of continuing payments.
Death benefit nominations
Pension funds where the member could have signed a binding nomination on the trustees so that they must make payment to a person nominated by the deceased, will form part of the estate for IHT purposes. Please note that this does not apply to an expression of wish, which is not binding on the trustees or scheme administrator.