Whilst leaving your pension benefits to a loved one may be a generous parting gift, ensure that your nomination form is completed accurately, or you could be gifting them more than you intended to…
Our Client Director, Linda Kozlowska reports:
I recently worked on a case where the beneficiary of a pension did not need – or want -pension death benefits. The beneficiary wanted another individual to receive these death benefits and although the pension trustee agreed to facilitate this, they were only able to pay a lump sum death benefit to this individual rather than giving them the full range of pension death benefit options (e.g. a drawdown account).
Why should this matter?
Importantly, a lump sum paid out of a pension is less tax efficient (assuming that it is not spent immediately or allocated to a ‘tax wrapper’) because income and gains will be subject to income tax. Pensions are tax efficient of course, because income and gains are tax free.
Pension funds are not normally considered part of the overall value of an estate and as a result, can usually pass onto your beneficiaries free from IHT. As a result of the pension freedoms act introduced in 2015, when provision is made in an appropriate way, beneficiaries can inherit a share of your pension as a pension in their own name. This is known as dependant’s drawdown (if inherited by a spouse) or nominee drawdown (anyone else, e.g. children, grandchildren, nephews, nieces).
How do I ensure my pension death benefits are set-up correctly?
The beneficiary can choose the quantity and frequency of withdrawals, potentially ensuring maximum flexibility and tax efficiency. However, it is important that the nomination form states the names of the individuals who you want to benefit. This is the only way to ensure that beneficiaries have access to the full range of dependant’s death benefits. The percentage stated on the nomination form can be as little as 1% – it is the named beneficiary aspect that is key.
Who can I nominate to receive my pension benefits when I die?
You can nominate anyone to receive the pension death benefits and the pension Trustees will take your wishes into account, though the needs of financial dependents (which spouses are) take precedence. Naming children means that if a spouse does not need the SIPP fund they can ask the Trustees to forgo them and pay benefits to other beneficiaries (e.g. children) who, if they have been named on the nomination form will have the full range of death benefits available.
When setting up your pension it is important to ensure your nomination form is completed in line with your wishes, and that of your intended beneficiaries. You should also look to review this at regular intervals, or after important life events (births, deaths, marriages, etc).
If you would like support or advice on your pension and need to understand more about the tax implications of the inheritance you will leave to your family, please get in touch with us at starthere@www.darblaywealth.com
To speak to Linda directly about your pension and retirement planning, contact her here.
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