5 Reasons to Set up a pension trust

5 Reasons to Set up a pension trust
Photo by Ray S / Unsplash

I was explaining to an adviser today, about what happens to their client’s pensions and death in service benefits, if the client died before starting to take that pension.

It can be a confusing topic, but I’ll break it down in simple terms.

Let's say you've been saving into your pension pot for a few years now, and you've also got some death in service benefits.

Normally, you’d name your spouse or partner as the beneficiary for this pension. Pensions are usually inheritance tax-free, which is great news, but there's an exception to this rule.

If you died before starting to take the pension, the pot of money is passed onto the nominated beneficiary.

If the beneficiary is your spouse or partner, the pension pot will be paid directly into the estate of the deceased.

This means that if you’ve got a sizable pension pot, you may have just created an inheritance tax issue by having that pension pot paid to the beneficiary!

The solution

To combat this issue, you can set up a pension trust, which keeps the pension pots outside of the estate for inheritance tax purposes.

On death, the pension pot is paid into the pension trust, of which your spouse or partner would be a beneficiary.

They could then loan those funds to themselves, ensuring that the money doesn't enter into the estate. This way, all the pension pots are kept outside of the estate for inheritance tax purposes.

Pension trusts can offer a useful way to manage and protect pension assets, particularly for those who wish to pass on their benefits to future generations or avoid inheritance tax liabilities.

Just remember,  the tax treatment of pension inheritance can vary depending on the individual's circumstances and the age at which they die, so make sure you seek professional advice before making any decisions.

If you're having these discussions with your client, here are 5 reasons why they should consider setting up a pension trust:

  1. Reduce Inheritance Tax:
    By setting up a pension trust, your client can help to reduce the inheritance tax liability on their pension assets. The trust structure allows pension assets to be passed on to future generations without being subject to inheritance tax.
  2. Greater Control:
    A pension trust gives your client greater control over how their pension assets are distributed after they pass away. They can specify who should benefit from the trust and how the assets should be managed.
  3. Protect Assets:
    A pension trust can help to protect pension assets from potential creditors or legal disputes. This can provide peace of mind for your client and their beneficiaries.
  4. Pass On Benefits:
    With a pension trust, your client can ensure that their pension benefits are passed on to future generations. This can provide a significant financial benefit to their children or grandchildren.
  5. Flexibility:
    A pension trust offers flexibility in terms of who can benefit from the pension assets. Your client can specify different beneficiaries for different portions of their pension assets, allowing them to tailor the trust to their individual needs.

Here's a table of some of the pro's and con's:



Can help to avoid inheritance tax liabilities

Setting up a trust can be complex and time-consuming

Allows for greater control over pension assets after death

Trusts may incur additional fees and administrative costs

Provides flexibility in terms of who can benefit from the pension

Trusts may require ongoing management and oversight

Can provide a way to pass on pension benefits to future generations

Tax treatment of pensions and trusts can be complex and subject to change

Can help to protect pension assets from potential creditors or legal disputes

Trusts may not be suitable for everyone's individual circumstances

A pension trust can be an excellent way for your clients to manage and protect their pension assets, whilst also ensuring that their loved ones are taken care of after they pass away. Your clients can enjoy greater control over their pension assets, reduce their inheritance tax liability, and provide for future generations.