View more on these topics

Double by-pass confuses points on perpetuity

John Woolley, a director of Technical Connection, says an amendment to the Perpetuities and Accumulations Act 2009 has brought new complexity

John Woolley
John Woolley

It would seem that in my previous article I was too optimistic that the Perpetuities and Accumulations Act 2009 had completely simplified the issue of the perpetuity (and accumulation) period that applies to a pilot spousal by-pass trust, that is, a trust established by a pension scheme member during his lifetime to which the pension scheme administrator/trustee has a discretion to appoint benefit.

Due to an amendment to the bill before enactment, we may well be left with an even more complicated position in this area than the one that existed up until April 6 this year.

Unfortunately, because of a committee stage change made to include section 15(1)(b) to the bill, it would seem that we now have two situations to consider – the position where the member joined the scheme before April 6, 2010 and where the member joined after April 5, 2010.

Members joining the scheme after April 5, 2010

In cases where the member joined after April 5, 2010, one would have thought that the new rules would apply.

Unfortunately, the position is not clear cut because the revised section 15(1)(b) provides that the new rules will only apply to trusts made in the exercise of a special power of appointment if the instrument creating the power takes effect on or after April 6, 2010. On the basis that the pension scheme created the power, if that commenced before April 6, 2010 (which is likely) would this then mean that the by-pass trust would be subject to the old rules?

Probably not. The better view is that section 19 (which applies where provision is made “other than by instrument”, which, as regards each member, is probably the case here) will apply to mean that the power is to be treated, that is, created by an instrument that was created when the member joined the scheme.

If this interpretation is correct, this, in turn, means the by-pass trust instrument which now holds the death benefit cash will be deemed to take effect when the member joined the scheme (that is, after April 5, 2010).

All in all, it seems to be a case of out of the frying pan into the fire and unfortunately that does not seem to be an end to the problems

Thus, the perpetuity period of such by-pass trusts will be 125 years from the date when the member joined the pension scheme because section 6(3) of the act is the reference point for the commencement of the perpetuity period.

The contrary view is that section 15(1)(b) must be read literally and in isolation so that the date of the pension scheme deed is looked at but this view leads to the anomalous result that the perpetuity period commences on a different date to that at the instrument creating it.

Members joining the scheme before April 6, 2010

For members who joined the pension scheme before April 6, 2010, the introduction of the wording in clause 15 (now section 15 (1)(b)) means that the old rules still apply – this is on the basis that the instrument creating the power of appointment will dictate the perpetuity period of the new trust and so the pre-April 6, 2010 position will apply. Section 19 will not help because the member joined the scheme before April 6, 2010 and before the new act takes effect.

The result of all this is that considerable confusion would still appear to exist over the perpetuity period of by-pass trusts established in these circumstances.

Relevant pension schemes are exempt from the peretuity rules (both under the old and the new legislation) but the more popular legal view is that this exemption would not extend to by-pass trusts funded from a payment from a registered pension scheme.

This, in turn, means that the pension fund consists of a number of individual trusts for each member and for the purposes of ascertaining the perpetuity period appropriate to a pilot by-pass trust for a particular member, the trust would be deemed to have commenced when that member originally joined the scheme.

This means that as the “old law” applies, the most appropriate perpetuity period would be a life in being (the member) plus 21 years. Thus, the by-pass trust would cease 21 years after the member’s death.

Other problems

It is most unfortunate that this change was made to the bill because it means that many payments to by-pass trusts where the member joined the scheme before April 6, 2010 will be thrown back on to the old, rather uncertain, law.

One can see that there is a good case for not introducing an act that has retrospective effect which could then circumvent the intention of the settlor who expressly created a family trust with a different perpetuity/ accumulation period.

However, it seems somewhat absurd to adopt that argument in a case where so much uncertainty exists under the current law, particularly given that virtually all members of pension schemes would not dream that they are acting as a settlor of a trust when they join a pension scheme and so the last thing on their mind would be the duration of a perpetuity or accumulation period.

The consultation paper published by the Law Commission in 1993 refers to the rule against perpetuities being established to control the terms of a family settlement. Can membership of a pension scheme be regarded as the typical “family settlement”? Would it not have been better to have applied retrospection to pension related trusts (but not express family trusts) and taken the opportunity to clarify this area?

All in all, it seems to be a case of out of the frying pan into the fire and unfortunately that does not seem to be an end to the problems.

As mentioned above, the new rules appear to apply only to spousal by-pass trusts that receive payments made from pension schemes that a person joined after April 5, 2010.

This raises a number of complicated issues. For example, it is very common for people to transfer pension plans to gain greater flexibility – especially into a Sipp.

We may well be left with an even more complicated position in this area than the one that existed up until April 6

What if a person transferred from a pre-April 6, 2010 personal pension scheme to a post-April 5, 2010 Sipp? He then dies and the Sipp trustees made a payment to a pilot by-pass trust. Under section 81 IHT Act 1984, the IHT rules trace payments between different discretionary settlements to determine when a settlement began but there is no such specific rule that applies for the purpose of the perpetuity rules.

Notwithstanding this, if property has passed between different trusts because of the exercise of a special power of appointment, it is probably legally correct to trace the commencement of the new trust back to the original ceding trust.

Unfortunately, the problem is that it is not at all sure that the transfer of pension rights can be regarded as the exercise of a special power of appointment or advancement.

Furthermore, what is the position if an individual has transferred pension rights, more than once or has his pension rights spread across several schemes – all set up at different times (some pre-April 6, 2010 and some post) and there is a desire to make payments to one by-pass trust?

Which pension scheme membership governs the perpetuity period of the by-pass trust?

Another difficulty may arise in connection with the ability of pension scheme trustees/ administrators to appoint death benefits to a postApril 5, 2010 pilot trust from a scheme which the member joined pre-April 6, 2010.

Section 5 of the Perpetuities and Accumulations Act states that any new trust must have a perpetuity period of 125 years (and no other period). This applies irrespective of whether a contrary (or no) perpetuity period is stated in the trust deed.

Any new pilot trust will therefore, by definition, have a perpetuity period of 125 years, yet the trusts of the pension cash will have a different perpetuity period.

How can this conflict be resolved? It is thought that, in such cases, any appointment of benefits would need to be on the basis that the perpetuity and accumulation period of the appointed benefits and property representing them would be on a different basis to the original property settled in the by-pass trust.

The perpetuity and accumulation periods in relation to the funds transferred would be the periods applying to the original pension scheme from which the funds derived by reference to the member concerned.

Overall, therefore, it seems that while this act restricts the options for perpetuity periods by setting out one longer period and removes the need for accumulation (in most cases), it has missed an excellent opportunity for simplification in relation to payments of death benefits out of pension schemes to pilot trusts.

Indeed, given the frequency with which people transfer pension rights these days, it may well have added to the confusion that previously existed.

During the second reading committee in April 2009, Lord Back spoke of the overall aim of the bill to “modernise, simplify and streamline the rule against perpetuities and the rule against excessive accumulations”.

As regards pilot trusts of lump sum death benefits created as a result of joining a pension scheme before April 6, 2010, the act would appear to do the complete opposite.

The new act does appear to give scope for amendment by statutory instrument in section 3. If this route is available, it is to be hoped that this process can be used to simplify the pension trust issues as soon as possible.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com