There is a common misconception that pensions will automatically be passed down in a Will, when in fact, trustees are the ones who decide where the money goes. However, you can nominate a pension recipient by using an expression of wishes or nomination form. This form tells the trustees who you would like the money to go to and whilst you can’t dictate the outcome, it is a very strong indication of your preference.
Prior to age 75, up to and including your lump sum and death benefit allowance (LSDBA, normally £1,073,100), lump sums from your pension are paid free of income tax. Death benefits are not paid tax-free, either as a lump sum or pension once you reach your 75th birthday. The named individual would pay income tax at their marginal rate, on the full amount.
Also, if you hold a pension or drawdown arrangement, there is the potential opportunity to pass your pension, intact as a pension, to your nominated individuals in the proportions that you desire. This means that the pension would not pay out of an environment where it grows free of tax and also into the value of their estate. Pensions grow tax free and normally don’t form part of your estate. Remember, if you die after age 75 and the pension pays out as a lump sum, the ‘beneficiary’ would pay income tax on the amount, as if it were earned income in the tax year of receipt. This could be expensive! This highlights the importance of checking with your pension provider, that there is in fact the option to pass your pension to your beneficiary, as a pension, by way of beneficiary flexi access drawdown.
This highlights the importance of reviewing your death benefit nominations. Failure to do so could result in a pension being inherited against your wishes, perhaps to someone you listed as a beneficiary many years ago. Plus, it may pass to them as a lump sum rather than flexi access drawdown, resulting in a significant taxation.
If you are unsure if you have ever done this or haven’t reviewed your death benefit beneficiaries recently, contact your provider or adviser. It’s essential to make sure it’s up to date and your pension will be inherited by the person you wish.
Summary
If a beneficiary has not been nominated, only a lump sum will be available. You also need to check that flexi access drawdown is an option with your current provider. If you were to leave residual benefits after age 75, this would allow beneficiaries to control how they incur the taxation by deciding when they access the pension. Otherwise, they would receive the full amount as a lump sum, which would be taxed at their marginal rate.
Get in touch
The above information shows the importance of death benefit nominations and why you should be regularly checking them. For further information on reviewing or changing your death benefit beneficiaries, or advice on how you can plan ahead to make the most of your finances, contact a member of our financial planning team today to talk through your personal circumstances.
Email financialplanning@pmm.co.uk or call 01254 679131.
