Q. I have recently taken out a life assurance policy for the benefit of my partner and our children, and was advised to use a trust arrangement to do so. Can you explain why this is needed?
A. A trust is a legal entity whereby the person setting up the trust (the “settlor”), gives property or assets to a second set of people (the “trustees”) to look after for another set of people (the “beneficiaries”). Trusts are used for a number of reasons. This can be to minimize the tax due, or to retain control over the money in the trust. However, with life assurance one of the primary benefits is that the trustees can make the claim for the policy proceeds, following the death of the life assured, to be paid out without having to wait for “probate” to be granted. Probate is the formal process of a will being proved, to demonstrate that the executors of the will are the correct legal representatives of your estate. Because the policy is owned by the trust, the trustees need only the death certificate to make the claim. The trust assets will be outside your estate for inheritance tax purposes, but this is often of secondary importance to putting the funds in the hands of the right people at what would be a very difficult time.
Q. I am a member of a final salary pension scheme and have benefits close to the Lifetime Allowance. Would it help to transfer my fund to a personal pension to draw benefits under the new flexible rules introduced in April?
A. The answer is no, for several different reasons. As a member of a “defined benefit” pension scheme, your pension is measured against the Lifetime allowance by multiplying by a factor of 20. At current annuity rates, it is likely that the Cash Equivalent Transfer Value you would be offered on transfer near retirement would be substantially higher than 20 times the pension at retirement, taking you well over the Lifetime Allowance and potentially incurring a hefty tax charge. The end result would be that you would lose the security offered by the scheme, but end up paying much more in tax instead. There are some circumstances where it is worth considering a transfer for the right reasons, but these are very limited, and Lifetime Allowance planning is unlikely to be one of them. I recommend you track down a Chartered Financial Planner who is qualified to advise on transfers from Defined Benefit schemes, who can advise you on your own particular circumstances.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
