Pension freedoms, whereby, there aren’t any restrictions (apart from marginal rates of tax) on the amount of money a person over the age of 55 can withdraw from their pension has undoubtedly sparked a demand for transfers to modern contracts which can provide all the retirement options on offer. Older style contracts typically do not cater for the new freedoms.
We have seen many of our clients transfer their older style pensions, if deemed suitable to do so, recognising how their pension savings can dovetail with their retirement plans, and provide a flexible inheritance for their families.
However, a recent ruling by the Court of Appeal could be a catalyst for anyone still pondering the transfer of their pension to make their decision sooner rather than later. The case, which has become known as the ‘Staveley case’, has made an IHT charge more likely for those who transfer their pension while in ill-health and unfortunately die within two years.
In 2006, Mrs Staveley had transferred her pension while knowingly in ill-health and unfortunately died a few weeks later. HMRC argued that the transfer constituted a gift of death benefits to her sons, at least in part. Her executors argued that the main reason behind the transfer was to prevent her ex-husband benefiting from her pensions.
The sons succeeded with this argument before the First Tier Tribunal, and later the Upper Tier Tribunal. Both concluded that there was no gratuitous intent, and so no IHT payable on the transfer. Put simply – because the transfer was not done to benefit anyone else, there was no gift.
However, in October this year, the decision was overturned by the Court of Appeal. They agreed with HMRC’s view that the transfer had indeed included a gift of death benefits to the two sons. Although the main reason had been to prevent any pension money going back to the ex-husband, it was not accepted as the ‘sole motive’.
The details of this case are complex, as witnessed by the 12 years it has taken the legal process to bring us to this point. It does, however, establish principles going forward.
Why IHT can arise on a transfer?
Pensions typically do not form part of the estate for IHT as the payment of death benefits are normally determined by the trustees/administrator and not the member. On the face of it, a pension transfer where discretion exists both before and after the transfer, would appear to be neutral for IHT as pensions are free of IHT.
However, HMRC take a slightly different view. Their view is that as one scheme comes to an end the member makes a fresh gift of the rights to the death benefits to the new scheme. This is because theoretically they could have chosen a pension that allows death benefits to be paid to their estate, however unlikely that may be. As a consequence, there is a loss to the estate when the transfer is completed to the new scheme.
In most circumstances, the value of the death benefit is negligible because most transfers are done when the individual is in good health and expected to survive long enough to take their retirement benefits.
BUT, if someone is in ill-health at the time of transfer, the gift could have a value. Being aware of these issues is important and may affect a person’s decision to transfer their pension. But it doesn’t necessarily mean a transfer should not go ahead even if the client is in poor health. It may still be good value despite a potential tax charge.
Does this case affect pension transfer advice going forward?
Potentially yes. The case highlights that it becomes difficult to see how the ‘no gratuitous intent’ defence (s10 IHTA 84) could be claimed for a pension transfer when the member is in ill-health, particularly as death benefits will be a key consideration for anyone advising on pension transfers.
But the vast majority who transfer their pension whilst in normal health are unaffected by this decision as the value of their death benefits will be negligible. So, it makes sense to transfer long before health becomes an issue.
The bottom line
People will react differently to the opportunities presented by pensions freedoms. Some will strike while the iron is hot and transfer immediately, once they have decided a transfer is right for them. Others may take a little longer to consider what they should do, particularly if retirement is years away – plenty of time, no need to rush.
But as the saying goes ‘Procrastination is the thief of time’. It may also take a bite out of what you leave to your family if you allow ill-health to be the trigger for taking action on transfers.