Ensuring your wealth is transferred to the right beneficiaries in the event of your death might seem a morbid undertaking, but it’s a sensible move. After all, being prepared for the worst-case scenario is something we do as a matter of course with insurance policies, which provide peace of mind as you get on with your life. Why should it be any different with a will?
Writing or updating a will can provide clarity on wealth transfer, but there are other pertinent issues too – for instance, what happens to your pension savings if you die?
The Office for National Statistics (ONS) estimates that 42% of total wealth in the UK is held in private pensions.¹ That is a great deal of money, but what plans do you need in place to ensure your pension funds pass to the right people and in the most tax efficient way?
Pension nominations can play a crucial role here by ensuring your funds are directed smoothly to a named beneficiary. And it’s worth remembering that anyone can inherit pension funds now, not just your spouse/civil partner or dependants.
This is how it works – you nominate who you’d like to receive your pension pot in an ‘expression of will’ letter which your pension scheme provider holds. You need to ensure your pension provider has up-to-date details of your beneficiary and if you have more than one pension, let all your scheme providers know.
There is flexibility to change pension nominations at any time. For instance, if you remarry or your initial beneficiary dies or is in extreme ill-health, you might want to inform your pension scheme provider with a new named beneficiary.
As with all financial planning, regular reviews are advisable. For example, if there is a surviving dependant, (a spouse) inherited drawdown can only be offered to someone else if the deceased had nominated them during their lifetime. Without that nomination, their adult children for example (no longer classed as dependants), won’t be able to choose inherited drawdown, meaning the only option is to pay them a lump sum.
From a tax perspective, most pension death benefits sit outside your estate so in most cases your nominated beneficiary will have nothing to pay. However, the tax implications are not simple in every instance.
For most pension lump sums where the owner of the fund dies before the age of 75, there is no tax; but income tax is deducted by the provider for those that die after 75.
It is important to check the death benefit options on your scheme, as not all schemes offer inherited drawdown. As a case in point, there is no tax payable on a new drawdown fund set up from 6 April 2015; however, money from an old drawdown fund first accessed before this date is subject to income tax.
For wealth to be passed satisfactorily from one person to another, the onus is on forward planning, regular review and understanding, and taking advantage of the options as and when they are available. Pensions are no different in this respect.
1. ONS Pension wealth in Great Britain – Office for National Statistics
Pensions are a long-term investment. The retirement benefits you receive from your pension plan will depend on a numberof factors including the value of your plan when you decide to take your benefits which isn’t guaranteed, and can go down as well as up. The value of your plan could fall below the amount(s) paid in. Tax depends on your personal circumstances and tax rules can change.