Focus 92 – Death benefits and illiquid assets
One of the concerns many people have when investing in illiquid assets such as commercial property is what would happen if the client were to die and the investment cannot be sold in a reasonable time scale, such that the lump sum death benefits cannot be paid out in a timely fashion. The answer is to choose a provider that offers the flexibility to pay death benefits in a way that is suitable to the client’s estate and that is used to dealing with these issues.
The most popular way to pay death benefits from uncrystallised funds it by way of the death benefit lump sum payment. This is free from any pensions tax charges and generally free from Inheritance tax as well. Because the whole fund is paid out, it is just as easy to transfer the asset to a beneficiary if that is their preference. There may be some additional charges that would need to be paid, such as the cost to transfer the title to the beneficiary but this could be significantly less than if the asset was forced to be sold at an inopportune time to a third party. In addition, assume that the property is part of a family business. Selling it at a time when one of the main members of the company has passed away will likely add increased pressure to the firm in the short term. Being able to transfer ownership back to the family would clearly make life a lot easier.
Once the pension commencement lump sum has been taken, or after age 75 there will be additional issues to contend with. These may make the choice of death benefits change, especially where you have assets that you want to remain within the family.
If paid out as a lump sum there will be a 55% tax charge, which means if there is not sufficient cash in the pension to pay the charges the assets will need to be sold to pay them. It is therefore an option, if there is a spouse or other dependent, to pass the SIPP and underlying assets to them by way of a dependents drawdown. This would again mean the assets do not need to be sold and can remain free from additional tax charges and IHT.
If there is unlikely to be a financial dependent at this point and if the asset is not to be sold on the open market, then care should be taken to preserve sufficient liquid assets to pay the tax charge should it be needed. This doesn’t necessarily need to be cash in an instant access account but freely realisable assets with a good market available for a quick sale.
Holding illiquid assets such as commercial property is not as much of a concern as many believe. That is as long as careful planning and discussions have taken place between the client and any family or other dependents, to ensure they are prepared and aware of the potential options should the member die. These discussions should especially focus on any property that is used by the members business and what the plans are on death for the asset.