Pension Transfer Pitfalls For Retirement Savers In Poor Health

Transfers away from workplace retirement schemes to personal pensions or QROPS for expats are becoming more common – but the tax man may want to know why you moved your money if you are in ill-health.

As pension schemes at one big company tumble, thousands of workers have chosen to shift their retirement savings to a SIPP or offshore QROPS.

But if they are in poor health and die within two years of the transfer, HMRC will demand details of the transaction.

One of the pension transfer issues often overlooked by advisers is moving the money between schemes may provide a transfer of value for inheritance tax.

Tax inquiry

This HMRC view is controversial and many critics claim the measure is unreasonable.

HMRC does accept retirement savers switch pension schemes to improve their finances rather than improve the death benefits for their beneficiaries, and that in most cases, they will live to enjoy the benefits and the actuarial loss to the estate will be modest.

But if HMRC knows the retirement saver was suffering a life-threatening condition when making the transfer, inspectors will examine the case to make sure the transfer was not made to improve the finances of a beneficiary.

The aim of the inquiry is to value the transfer for applying IHT.

Calculating the value of a pension transfer

If you are unfortunately in this position and seeking to do the best for your family and loved ones, it’s worth carrying out the valuation before the transfer takes place.

  • To do this, calculate the death benefit your estate would receive from your pension if the money stays where it is and when moved into another scheme.
  • Next, determine the open market value of the death benefits if the beneficiary is over 55 years old.

Subtract the second from the first to give the value of any loss to the estate

The workings may be more complicated if a flexible access pension is involved. The calculation will also have to account for any breach of the £1,000,030 lifetime allowance and any enhanced death benefits associated with the pension.

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