Cascading pension death benefits without the probate wait

Estimated reading time: 4 minutes

Tucked away in the 2018 Autumn Budget, you’d be forgiven for missing the relatively unnoticed amendment to probate fees. We’ve covered the most pressing matters for clients on the treatment of pension death benefits.

Probate fees are set to increase

Currently there is a flat probate fee of £215 where the estate value exceeds £5,000 (and a solicitor is not used). However, the Budget applies a tiered structure from 6 April 2019. Only individuals with estates worth under £50,000 will pay less under the new regime (having the fee waived altogether). By contrast, the application fee where the estate value exceeds £2 million will be £6,000. Any Inheritance Tax (IHT) due on the estate must be paid before probate is granted.  Grant of probate provides legal control over a deceased’s estate.

SIPP and SSAS assets are commonly held under a discretionary trust and typically fall outside the member’s estate. Discretion over their distribution on death, therefore, allows beneficiaries access to the funds, before probate is granted. This will often come as a welcome relief to the bereaved, who may otherwise lack liquidity to meet an IHT bill, during what could be a lengthy probate application at an emotionally difficult time.

Ease of administration

We act as operator, sole trustee and Scheme Administrator to our Flexible SIPP.  This means we will decide upon the distribution of death benefits having taken guidance from the deceased member’s Expression of Wishes form, family and/or their professional advisers.  We can also administer and distribute death benefits without asking for paperwork to be signed, which means less intrusion for grieving families. Importantly, the final decision over the distribution and form of pension death benefits rests with the operator and scheme trustee, which usually then means that no IHT is payable on them.

We also act as professional trustee to the vast majority of our SSASs. We will therefore carry out these distributive duties along with the remaining member trustees, giving them an increased level of both control and responsibility, as well as providing the co-trustees with guidance on the nuances of death benefits legislation.

Tax treatment

April 2015 ushered in radical changes to the tax treatment of pension death benefits. Where an individual dies before the age of 75, payment of their pension savings are usually free of income tax to the beneficiaries (assuming the deceased member has sufficient available Lifetime Allowance). Conversely, where an individual dies aged 75 or over, distributions are subject to income tax at the recipient’s highest marginal rate, (which is still more generous than under previous rules). In either case, the funds generally fall outside of the member’s estate and so are not subject to IHT.

Furthermore, drawdown funds providing ongoing income to a dependant and/or nominated beneficiary are treated in a similar way on all subsequent deaths. One major difference is that these funds will not be tested against a beneficiary’s Lifetime Allowance.

Cascading of wealth

Given the generous changes to legislation highlighted above, it is plausible that funds within a SIPP or SSAS could cascade a perpetual source of income down through the generations of the deceased’s family. If the return on investments (whether this be from rental income, increases in the value of equities, etc.) exceeds the amount drawn as pension income and the associated fees and costs, the fund will, theoretically, never be depleted. This, of course, assumes that no changes to the prevailing death benefits taxation regime occurs in the future (which cannot be predicted).

The speed of payment and tax-efficient distribution of pension death benefits offer powerful advantages to accumulating funds within trust-based pension arrangements, as opposed to other forms of saving that form part of a deceased’s estate on death (for example, an ISA).

As with Life Assurance policies written in trust, not having to wait for probate to be granted – and now with the possibility of higher fees – provides surviving beneficiaries with potentially much-needed funds at an emotionally difficult time.