James Floyd, Managing Director at Alltrust, consider the challenges to wealth preservation between generations and the argument for the Pension Family Trust (FPT) solution.
Building a fortune is one thing; preserving it for future generations is another challenge altogether.
Affluent families often worry that much of their wealth could dissipate due to taxes, mismanagement, or creditors by the time it reaches children and grandchildren.
While standard pensions have a role in estate planning (UK pensions are not yet subject to inheritance tax), they were not originally designed with multi-generational wealth transfer in mind.
Historically, many pension schemes offered limited death benefits – perhaps an income for a surviving spouse, but not much for the kids. Even with modern pensions, there’s a risk that once funds are withdrawn by beneficiaries, they could be spent unwisely or become exposed to creditors or divorce settlements.
Enter the Family Pension Trust (FPT): an innovative structure created to address these concerns by keeping pension wealth within a protective family-controlled umbrella.
What is an FPT and How Does It Work?
In simple terms, a Family Pension Trust is a group Self-Invested Personal Pension (SIPP) – a pension scheme structured as a trust, with family members (or a small group such as business partners) as its beneficiaries.
Instead of each individual running a separate pension in isolation, the FPT allows the family’s pensions to be managed collectively, while still keeping each person’s share separate in terms of investments and entitlements. The trust is managed by trustees (often including the family members themselves and a professional trustee), who oversee the investments and ensure the trust rules are followed.
Crucially, an FPT is designed for long-term generational thinking. Members can pool resources for investment opportunities that might be out of reach individually, and the trust structure can continue even as one generation retires and the next one joins.
The assets inside the trust are legally protected – they typically can’t be seized by creditors if, say, one family member faces bankruptcy, and they’re shielded from estate taxes as long as they remain within the pension wrapper.
This means the wealth can grow and eventually benefit children and grandchildren with far fewer leakages along the way.
Future-Proofing Wealth – Benefits and Considerations
The primary benefit of an FPT is control and continuity. Families can set guidelines (via the trust deed) on how and when beneficiaries can access the money – for example, perhaps allowing younger members to draw income only at a certain age, or to fund education or a first home. This prevents the classic worry of an heir blowing their inheritance.
FPTs also maximise tax efficiency across generations. UK pension rules now allow unused pension pots to be passed on without inheritance tax; if the original member dies before 75, the beneficiaries can even receive the funds tax-free, and if after 75, beneficiaries pay income tax only when they withdraw funds.
A family trust structure dovetails with these rules by keeping funds invested for the long term and letting each beneficiary withdraw in a tax-efficient manner as needed.
Over decades, this can mean significantly more money stays invested and growing for the family’s benefit, versus being drained by one-off tax charges or forced annuity purchases typified by the past. By using an FPT, a patriarch or matriarch can essentially create a legacy pension fund that, with prudent management, could support multiple generations’ retirements.
Of course, setting up a Family Pension Trust is a sophisticated move. It requires specialist advice, good governance, and a willingness among family members to cooperate on financial matters. There may be initial costs and ongoing administration to consider too.
Conclusion
The Family Pension Trust isn’t something for every family – generally it appeals to high net worth families who have substantial pension assets and a clear intent to build a dynastic financial plan. For those families, an FPT can be a cornerstone of future-proofing their wealth.
Families are starting to take a collaborative approach to retirement planning. A Family Pension Trust enables pooled resources and structured wealth transfer, so that hard-earned pension savings can be protected in a tax-efficient way. It combines the best of pension freedoms, which includes investment choice and tax advantages, with the rigor of a trust structure to ensure that family members’ hard-earned wealth isn’t just enjoyed by them, but also by their children, grandchildren, and even beyond.
In a world where people live longer and financial landscapes shift, the Family Pension Trust stands out as a forward-looking tool for longer term intergenerational financial security.
By James Floyd, Managing Director at Alltrust
