Bypass trusts
Given this flexibility to pay pension scheme death benefits through the generations, the question arises as to whether there is still a need for the member to set up a discretionary trust (spousal bypass trust) during their lifetime to which death benefits could be paid when the member dies.
Control versus tax efficiency
The prime objective of such a trust would be to provide a mechanism to prevent parties being overlooked for benefits, as well as possibly to provide tax efficiency.
In the example quoted above, Mr Smith, by putting some or all of the pension money into such a trust, could have ensured a ring-fencing of the benefit for his grown-up children and kept it all from passing on to a successor he did not know.
The extra flexibility and control of a bypass trust may appeal because the pension scheme member can, during his lifetime, inform the trustees that he has chosen whom he would like to benefit after not just his death, but also his wife’s.
On death post-75 there will be a tax charge of 45 per cent on payment into a bypass trust. This appears to be quite high, but a credit for this tax charge may be available where a later payment is made to an individual beneficiary.
Trustee’s discretion
A key issue in all this is the process and the exercise of the trustee’s discretion. It is a true discretion, so it is difficult to be definitive; however there were some useful words from the Pensions Ombudsman in an industry press article:
It stated: “They have to make sure their decision isn’t so out of kilter that no other reasonable body of trustees would have made it,” and: “There is quite a margin they have to exercise their discretion.”
From a legal perspective, the trustees must make sure that the right tests have been applied, the relevant factors have been considered, and irrelevant factors have been discounted.
The Pensions Ombudsman added: “They just have to apply common sense. They don’t necessarily have to agree with the individual, they have to look at the facts they have got and ensure they are making a decision within a range of decisions that a reasonable body of trustees would have made.”
