Death benefit control conundrum – could a SSAS be the answer?

Since the death benefit rules changes back in 2015 as part of the pension freedoms, we have seen a significant fall in the use of bypass trusts. When anyone can be a pension beneficiary, not just a dependant, in a lot of cases it makes sense to designate the funds to drawdown and keep them in the pension with all its tax advantages.

When it comes to death over 75, leaving at least some funds to grandchildren, rather than children, could be more tax efficient. For those two generations down the line, their personal rate of Income Tax may well be lower than their middle-aged parents. For wealthy families especially, it makes little sense for money to be left to a higher- or additional-rate-payer parent to pay school or university fees, when if it went direct to the child, they can access up to the personal allowance each year completely tax free and use the funds for the same purpose.

A concern for many with this approach will be control. For beneficiaries under the age of 18, Mum or Dad will control the pension and any withdrawals, but once they hit that big birthday, there’s little they can do if their child decides to spend it all on partying.

Bypass trusts could give the desired control; however, they are not as tax efficient as the pension option. This is especially true on death after age 75, where 45% tax is deducted when funds move from the pension to the bypass trust following the member’s death. When distributions are later made from the trust, it is possible to offset this 45% tax paid against other income (or reclaim if no/insufficient tax is due in the year), but you will still lose out on the effects of compounding of that 45% which would have remained in a pension.

One alternative that is not often considered is using a SSAS as a family pension trust. This isn’t going to work for everyone – for a start you need a sponsoring employer – but for a family business, it can be a worthwhile option. Unlike a SIPP or other personal pension, the benefits don’t need to be moved on death. The beneficiary, if not already a member, can simply join the scheme – there is no requirement for them to be an employee of the sponsoring employer. It is also possible for children to join as, unlike standard members, beneficiary members do not need to be trustees. Any request to take benefits is made to the trustees. So if your just-turned-18-year-old beneficiary wants to take out all their income, they can’t do it without the knowledge of the other member trustees, who in a family trust will be parents or other family members. This gives the trustees an opportunity to discuss it with the beneficiary before funds are taken and, if necessary, use their powers of persuasion. Far better than finding out after the event.

This article was previously published by SIPPs Professional