Should a young manager with a terminal illness transfer their final salary pension to a SIPP for the benefit of their family?
29 July 2021
Question by Roger
Should a young (early 40s) middle manager with a terminal illness transfer their final salary pension with a public sector service provider to a SIPP for the benefit of their spouse and young children? Any thoughts?
Answered by Boring Money
This is a difficult one to answer without having details of the scheme as this will differ based on the scheme rules. There are several different considerations and I would strongly recommend seeking advice from a financial adviser.
Scheme ill health and death benefits
You will need to check with the scheme administrator/provider to determine what the terminal illness benefits are with the scheme, these will also differ based on whether the member is active (still working for the company) or deferred (have left employment). They may provide the benefits as a one-off lump sum or allow early access to the pension this usually depends on the members likely life expectancy.
Death benefits may also be attached to the final salary pension as in it could provide a death in service lump sum (usually a multiple of salary) plus a spouses and children’s pension which would usually be a percentage of the member’s pension.
The first step would be requesting a transfer value, you would need to check with the scheme whether a transfer is possible. If possible, the scheme can take up to three months to provide the Cash Equivalent Transfer Value.
If the value of the pension being transferred is over £30,000 then you would require a transfer specialist to provide advice on whether the transfer is recommended or not. There would be a charge for this.
Please note that by transferring the scheme pension there will also be an ongoing annual cost for the SIPP and the returns will be dependent on the underlying fund performance. Both the cost and the investment risk will be borne by the member, unlike the scheme pension where this is borne by the scheme.
The actual transfer itself is not a straightforward process and can take over a year to complete, which in some cases has led to the member passing away before the transfer has completed.
Death benefits for a SIPP
You can select who will receive benefits and the benefits will be based on the value of the fund and how the underlying funds have performed. The options are that the pension can be used taken as a lump sum or used to provide an income in the form of annuity or using flexi access drawdown.
If the member dies before age 75 and the funds are designated within two years, then the benefits would be free of income tax.
Pension Transfer 'two-year rule'
Pensions are normally outside of the estate for Inheritance tax purposes however transferring whilst in poor health could result in IHT becoming payable. A pension transfer may be treated as a 'transfer of value' and added back into the estate for IHT if they are carried out whilst the member is known to be in ill-health.
The value transferred will have no value if they are in normal health at the time. HMRC will assume someone is in normal health if they survive for two years.
If the member dies within two years, the client's executors must report this to HMRC. The value transferred will then be based on the facts of each individual case.
By necessity, this briefing can only provide a short overview and it is essential to seek professional financial advice before applying the contents of this article. This briefing does not constitute advice or a recommendation.