Pension Death Benefit
In the July newsletter we discussed the importance of both making a Will, and reviewing any existing Wills, to make sure that your wishes were followed upon your death and that your loved ones were provided for. However, unlike your property, savings and other investments, your private pension does not form part of your estate on death, and that means it won't be covered by your Will. ... The pension trustees will make their decision based on any information it has or manages to acquire once you have died. We believe that equal consideration should be given to what happens to pensions savings on death.
For many of our clients, their Pensions are a significant part of their total private wealth. To ensure that you achieve the best outcomes for your remaining pension funds on death, it’s crucial that your wishes are identified and that everything is put in place to get your money into the right hands with the least amount of tax payable. To achieve this, you must have the right pension, with the right nominations, at the right time.
You can request how you want to pass on your pension wealth using a nomination form which you may be familiar with. It's possible for anyone to be nominated to inherit pension funds - not just dependants. Inherited drawdown allows pension wealth to remain within the pension wrapper, available to them as and when they need it, rather than it being paid as a lump sum. And there's no requirement for them to wait until they reach age 55 to access it.
The main pension rule governing defined contribution or private pensions in death is your age when you die. If you die before your 75th birthday your pension can be passed to your beneficiaries tax-free. In this scenario, private pension payments after death can be taken as a lump sum, invested in an inherited pension, or used to purchase an annuity. The inherited pension that you pass on to your loved ones should you die before the age of 75 is the most tax efficient product available to investors and your dependants should take financial advice before taking money from them. The money invested in this type of plan will grow free of tax and can be withdrawn free of tax irrespective of the tax rate of the recipient and is free from inheritance tax in the majority of cases.
If you die after your 75th birthday your beneficiaries will be subject to their marginal rate of tax on any withdrawals they take from the inherited plan.
Not all pension schemes can offer the full range of death benefit options. Some schemes have not adopted the full flexibilities or don't have the systems in place to offer them. For example, some older schemes cannot offer inherited drawdown and the only income option for someone dying in such a scheme may be an annuity. This could mean a transfer to a modern pension now will be necessary to ensure your future wishes are met. We only recommend pensions that offer the full flexibility, however if you have other pensions that we do not advise on then it is prudent to find out what death benefit options they offer.
Making the right nomination
The death benefit nomination helps to guide the scheme trustees/administrators when exercising their discretion. It’s vital to review these regularly to ensure that the right people benefit and can access their inherited pensions using all the options allowed by law. It is a complex area with a few potential pitfalls so please contact us to discuss your situation if you would like to explore your options. Changes in your own circumstances will often prompt a rethink with regards to how you would like your death benefits distributed.
There are several scenarios which typically prompt clients to want to explore their options with us:
Reaching or getting close to age 75.
Your spouse has sufficient money in retirement, so you want to explore leaving pension benefits to children / grandchildren.
You wish to nominate a minor which may seem attractive but does have potential drawbacks that you need to consider.
You may have children from a previous marriage who you want to ultimately benefit from your pension savings, but you want your current spouse/Cohabitee to be supported as well during their lifetime. This is a particularly complex area of pensions advice and does require great care.
The death of a spouse will trigger a discussion and rethink.
A divorce will prompt the need for a discussion about the options for passing your wealth to your loved ones.
You want to pass your pension benefits to a loved one in the event of your death to ensure they are provided for, but due to their current circumstances it may not be a good time for them to have access to a large amount of money. An example could be passing money to loved ones who may be having matrimonial issues or to a loved one who is currently experiencing challenges that receiving a substantial sum of money could exacerbate their situation. Again, this is a complex area for advice but is a very important discussion to have should you or any of your friends and family be in this position.
The purpose of this article is to highlight the importance of pension nominations ensuring that your pension benefits are passed to who you want them to be passed on to, and at the right time. It is a very complex advice area with lots of different options and considerations which is why I have only touched briefly on the key points.
If you would like any further information on the above, please contact us on 📞02476 388 911 or 📧 [email protected]