Pension wake up
AUGUST 13TH, 2010 By DAVID
During the course of this week I was asked by a client about the implications of the case, Fryer v HM Revenue & Customs, and I thought that now would be an opportune time to explain the background to the case and to hopefully clarify any confusion which may have arisen.
The Fryer case involved an individual who had a pension with a retirement age of 60. The pension provider issued a retirement pack to the individual before their 60th birthday but the individual did not respond to say whether they wanted to take benefits.
The individual died less than two years later (having still not taken benefits from their pension) and HM Revenue & Customs successfully argued that inheritance tax should apply to the lump sum death benefits, as in their opinion the individual had deliberately intended to convey a death benefit to someone else.
The lump sum death benefit from an uncrystallised pension arrangement is normally paid free of inheritance tax, and it is for this reason why the Fryer case has caused such a stir.
Does the Fryer case mean that HM Revenue & Customs has adopted a new approach to pensions? The simple answer to this question is no. HM Revenue & Customs has long held the belief that the main aim of a pension scheme is to provide a replacement income in retirement and not to provide a vehicle for the accumulation of capital sums for the purposes of passing on wealth. This is especially relevant when you consider that tax relief is granted on contributions made by an individual during the accumulation stage.
Most pension schemes allow an individual to dispose of the death benefits and to make changes to the benefits that they are entitled to. Usually, an individual can nominate, appoint or assign the death benefits to another individual/trust and/or make changes to the pension benefits they intend to take and when they intend to take them.
HM Revenue & Customs has confirmed that if an individual made a nomination, appointment or assignment, or made any changes to their pension benefits in the two years before they died, then there may be a liability to inheritance tax depending on the individual’s circumstances (including state of health).
This last point goes to the heart of the argument put forward by HM Revenue & Customs in the Fryer case, as the individual in question was in poor health at the time that they did not take benefits from their pension. Furthermore, the deceased’s legal personal representatives could not demonstrate why the individual had decided to defer taking benefits, or why that decision was not a deliberate attempt to preserve a lump sum death benefit.
What can be learnt from the Fryer case? The first lesson is that greater care must be taken when selecting the retirement date on a pension. For example, when given the choice, a lot of clients will automatically select the earliest retirement date possible but will then work beyond that date for one reason or another. Clearly some pension schemes (e.g. defined benefit) do not offer a choice as the retirement date is determined by the employer.
The second lesson is that if an individual’s circumstances change and it becomes clear that the retirement date will need to be altered, then independent financial advice should be sought and the reason for changing the retirement date should be recorded.
Posted in: Retirement planning