Now is the time to check who is set to inherit your pensions
When we review a new client’s finances for the first time, one thing we often see is that they haven’t specified who they want to inherit their pensions. Or even worse, it’s not been reviewed for so long, the person specified is not the right person any more.
Did you know that your pensions don’t follow your wills in terms of who inherits them if you were to pass away?
Did you know that completing a simple form may reduce the tax your loved ones pay?
What about that old pension from when you first started working – can you remember who you might have nominated back then?
We’re providing a free template so you can nominate your loved ones to inherit your pension and give you one less thing to worry about in these uncertain times.
So what happens to pensions when someone dies?
Pensions are typically set up under what’s called a Trust, which means they don’t normally follow what is laid out in your Will (also a very important document to have).
This is good news, as it means on death your pensions are unlikely to be subject to a 40% inheritance tax charge – meaning your loved ones may receive more and be better looked after.
What it also means however, is that you need to complete an “expression of wishes” form to tell your pension company how you want the money in your pot to be paid out, if something was to happen to you.
A helping hand from us
In these uncertain times, it’s only normal that people are taking stock and asking questions about their finances. “Will my loved ones be looked after if something happens to me?”
Take my father – he’s in his mid 70s and a matter of weeks before lockdown was starting, it took a family intervention to stop him trying to drive himself to Spain after his flight was cancelled.
A month later, once the reality of Covid-19 is clear to the point our own prime minister has given an emotional video appeal to thank the NHS for saving his life, my father has taken to re-reviewing his finances should something happen to him.
Situations like these can really focus the mind. And that’s where we can help. We know that most people haven’t made this simple nomination on their pensions. We also know that doing so and also understanding what happens to your pensions, will help take a weight off your minds.
As such, please click below to access a form that you can complete at home to get this set.
Using our form to nominate your beneficiaries
After downloading the form, you’ll need to enter the name of your pension provider and policy number that this document relates to. You might need to dig through your paperwork to find these.
You then simply need to enter in the names and % of the pot, for who you’d like to inherit your pension. This can be anyone – a spouse or partner, children, friend or perhaps a charity.
But read on for some tips on how to do this in a more effective way. It’s worth spending a bit of time here as how you nominate your beneficiaries can change the tax that they pay.
How are my pensions taxed on death?
Years of ever-changing legislation means taxation of pensions is always slightly complicated. The below is a shortened overview, however it’s worth seeking advice to ensure you set things up correctly for your personal circumstances. Below, I’m going to talk through a more typical invested pension pot, rather than a final salary/defined benefit pension.
The first thing to note is your pot is typically free from inheritance tax. This is an important consideration for those in retirement, as it means retaining money in your pensions could save your loved ones a 40% inheritance tax haircut when you pass away. One of the ways an adviser can add significant value is in building a model of your finances to plot out how best to decumulate wealth to preserve these types of assets and leave your beneficiaries significantly better off.
After inheriting your pot, typically speaking if you passed away before the age of 75, then your pot can be accessed tax free by your heirs.
After the age of 75, in most instances the beneficiary will pay income tax at their marginal rate as and when they draw money from the pot. If this is managed sensibly, this can mean 20% tax, but for high earners this could mean 45% tax, so it’s worth thinking carefully who inherits your pensions, and reviewing this regularly to make sure this fits into the overall plan alongside your wills to be tax efficient.
But there’s a caveat to all of this – the person needs to be nominated on your expression of wishes form in order to have all of the options available to them. Simply putting someone’s name here could change the tax they pay!
One other thing to flag, depending on the pension you have (especially old ones) – your beneficiaries may be limited in how they take income and this form won’t override that fact. You should have an adviser review your various pots, to make sure your loved ones are looked after properly should you pass away.
Being a little smarter
With the above in mind, we can be a little more astute in how we complete these forms. Let’s think about a fairly typical example here: many of our clients will have a partner and children.
Most likely, they won’t have completed a nomination form – but if they have, then it’s likely going to say: “100% to my spouse/partner”.
But as I’ve mentioned earlier, simply listing someone on this form can reduce the tax they pay. In the above example, should something terrible happen and both partners pass away, or the spouse does not need all of the pot, their children may not be able to retain the money in the tax efficient pension as they are not listed on the form!
The way we can solve this is letting the pension trustees know your order of priority i.e.
- Priority 1 – 100% to my spouse/partner
- Priority 2 – 50% to each of my two children
- Priority 3 - Etc.
Now in this example, if the spouse doesn’t need all of the pot, or isn’t around - the children should be able to retain the funds in a pension and draw down as needed. Potentially saving them a 20%-45% haircut. It also ensures the trustee's aren't guessing who they should pay the remaining money to.
It’s never nice to imagine these situations, but not thinking ahead of time and doing simple things, like nominating who inherits your pension or setting up a will can have severely detrimental effects on your loved ones.
Now more than ever, when it comes to financial planning, it makes good sense to plan for the worst but hope for the best. This mindset can help individuals make sure their finances are in a strong and robust position so that when events come along like we’re seeing right now – there’s one less stress to worry about.
We should all be using the current situation to review if we would have structured our finances differently, should we have known this was coming. This will help make sure next time round, you’re better prepared.
If you’d like to speak to us about reviewing your pensions, estate planning, or even a review of your general finances to help make sure you’re in a better place for the next event that comes along, you can book a call in with one of our partners by clicking here.
Compliance kept simple
The rules for your pension may differ to the above. Please speak to your specific pension provider and provide them with a copy of the form to ensure that it is valid and so they have a record of your wishes on file.
This document is for UK retail investors. Circumstances vary for individuals and any personal opinions or firm opinions represented in this presentation should not be seen as advice or a recommendation to take any specific course of action. We are not tax advisers. This is based on our understanding of current legislation which is subject to change.