Investment trusts are ideal to pass on a pension

Passing on your pension

One of the most important changes under the new pension rules, which came into effect in April, is that it is now possible to pass on your pension pot to your children and grandchildren when you die, even if you have already taken a cash lump sum or started drawing income.

With old-style annuities, the fact that any remaining capital disappeared into insurance companies' coffers after death was seen as a major disadvantage by investors, quite apart from lack of competitiveness in annuitised products in recent years. The new rule could influence how you decide to invest your pension pot when you get to retirement.

The taxation of pension benefits also makes passing on your pension pot an attractive option. It could now be more tax-efficient to leave your pension pot to your beneficiaries on death, rather than other investments, because your pension will not normally be subject to inheritance tax (IHT).


Moreover if you die before age 75 your beneficiaries will receive your pension benefits tax-free. Even if you die after age 75, they are only likely to be taxed at the same rate as their earned income.

The rule applies to money purchase pensions whether or not you have already started drawing benefits yourself.

If you decide to consolidate all your pensions into one self-invested personal pension (Sipp) and draw down your retirement income from it, you will be planning for the long term in any case, and you may take the view that your investment strategy should first and foremost be suitable for your own income needs.

However, if you have more than one pension pot, you may decide to earmark one to pass onto your children. Many people retiring nowadays have a combination of final salary and money purchase pensions.

So if, say, your final salary scheme provides you with a sufficient basic income, you may decide to use another pension to set up a Sipp for inheritance purchases.

So what type of investment trusts might be particularly appropriate for this type of pass-on-a-pension Sipp? As always, it is likely to depend on your attitude to risk.

Financial adviser Francis Klonowski of Klonowski & Co says: 'I would probably still plan as though people were going into drawdown because even if someone is thinking of passing on their money, they may not want to take too much risk with it.

'I would start off with some good solid global generalists such as Bankers, Monks and Scottish Mortgage. For UK exposure I would include Aberdeen UK Tracker to keep costs down, plus Dunedin Smaller Companies for growth. Then I would add TR Property for diversification.'


The amount of money in someone's pension pot is also likely to play a part, says David Liddell, founder of investment trust advisory service IpsoFacto.

But in any case, he says: 'I would favour including some tried and tested UK equity income trusts such as Edinburgh Investment Trust, Finsbury Growth & Income, Lowland or Temple Bar. These trusts would provide a good foundation at the low end of the risk scale. The income they produce could be rolled up and compounded for your beneficiaries.'

Investment trusts have been used to manage family wealth in the past, so when you are thinking of transferring assets through the generations using your Sipp, the simple answer is to opt for trusts that are managed on that basis, says Stephen Peters, co-head of collectives research at stockbroker Charles Stanley.

'These include, for example, RIT Capital Partners which is still 40 per cent owned by the Rothschild family and is chaired by Lord Rothschild, with two other Rothschilds on the board, and Caledonia, where the Cayzer family owns some 48.5 per cent of the share capital.'

Peters points out that there are other trusts with managers who have a similar long-term mentality when it comes to investment.

He names trusts such as Nick Train's Finsbury Growth & Income, James Anderson's Scottish Mortgage, Mark Barnett's Edinburgh Investment Trust and Perpetual Income & Growth, plus Personal Assets managed by Sebastian Lyon.

However, even these managers' trusts will suffer when markets fall. Andrew Merricks, head of investments at Skerritt Consultants, warns that whichever trusts you choose for a pass-on-your-pension Sipp, you must prepare for ups and downs.

That said, he echoes recommendations for this type of Sipp made by other advisers including RIT Capital Partners, Personal Assets, Temple Bar and TR Property.

In addition, he puts Worldwide Healthcare on his list. He says: 'This trust is one of my favourites, as I believe the sector is likely to do well over the coming decade as demand for healthcare increases.'

However, he also sounds another warning about the new pension rules. He points out: 'Governments can change their minds on a whim, so it is possible that the current freedoms could be reversed.

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