Why put a pension in a trust, when it already is?

Pensions are typically held under a master trust with the life company. So why would you want to use your own trust for the death benefits of a pension as well?

In most circumstances, on the death of someone before retirement, the death benefits (usually 100% of the fund) would be left to the deceased's spouse. There is no Inhertiance Tax (IHT) to pay on this whether they are married or not, as pre retirement, pension death benefits are free of IHT. It is however from here on that the problems can start to arrise.

Lets use an example of Posh and Becks being married, and Becks sadly passing away. Firstly, if Posh were to remarry to say Juan, and then get divorced, Becks' pension pot is increasing the amount lost through a divorce settlement to Juan . Even worse, if Posh were to remarry, then die, Juan could recieve the full amount of Becks' pension pot. This means Juan could leave this money to his children, and Brooklyn et al recieve none of it.

Finally, when Posh sadly passes away, Becks' pension will be included in Posh's estate, and therefore will now be taxed through IHT at 40%, so Brooklyn et al will only recieve 60% of it.

Had Becks left the death benefits of his pension to a trust, Posh could have still used the proceeds, but as an interest free loan from the trust. This provides protection against divorce and IHT, whilst also ensuring that Brooklyn et al definately recieve what Becks' would have no doubt wanted them to.

Given that a pension fund is often the second largest asset somebody owns, after their house, it is vital to ensure that this passes through the generations in the manner, and with the tax efficiency that you would want. The life company's master trust cannot allow you do any of this planning, so you need to create a trust to shelter the benefits of the pension for your next generation.