Keep IHT away from pensions

As the saying goes, nothing is certain except death and taxes. When you put the two together you get Inheritance Tax (IHT), and in my experience of the pension world the subject of IHT is also certain to come up on a regular basis – I’ve had two queries on the subject in the last two days.

You probably know that 99% of the time your clients’ pensions will not be subject to IHT, but the other 1% causes uncertainty. These usually relate to transfers in ill-health and the will-they-won’t-they debate as to whether they’ll be caught (and even when you think they will, HMRC may not bother to attempt to claim tax).

Ill-health transfers and loading contributions on the death bed aside, it’s the hoops we have to jump through to keep the straightforward cases out of the IHT net that can be particularly frustrating at times.

Most death benefit cases I see aren’t complex. Take a case where the deceased has completed a nomination form to leave 100% of benefits to their spouse. Simple. However, like most pensions, our scheme rules give the scheme administrator discretion as to whom the benefits are paid. This means we have to make enquiries to ensure the spouse is the most appropriate beneficiary. If we didn’t make any checks and just followed the nomination automatically, then effectively that is a binding nomination, and it would come into the IHT net. In this instance, that wouldn’t be an issue as the spouse is the recipient and there is spousal exemption. However, if funds were left to a child instead of the spouse then the potential for IHT arises. And it’s not as straightforward as having binding nominations for some members, and non-binding for others. Some providers have tried that in the past, but when tested there has been at least one ruling by an ombudsman where, as the scheme rules stated the administrator had discretion, the nomination perceived as binding wasn’t actually binding at all.

So we’re back to the point where scheme administrators have to check each case. Checking marriage certificates, whether parties are separated or divorced, whether there are any other dependants that should be considered, etc, etc, adds time and cost and delays payments of death benefits when they could be needed most. And, of course, adds to the stress of parties that are recently bereaved.

Wouldn’t it be simpler if we could just have a carve-out for pensions that meant they were always outside the estate without the need for discretion (with the only necessary exemption being for those last-minute excess contributions paid in knowledge of terminal illness)? If that was the case, then we could pay out on straightforward cases with only basic checks and make the whole process less painful for all involved.