Death Benefit Nominations on Pensions

Following the recent changes to pensions, this article highlights how some simple ‘housekeeping’ within your pension arrangements can make a phenomenal difference to your family’s position.

What do you need to know?

Pensions fall outside of your estate for Inheritance Tax purposes as they are held in Trust. This structure affords us the attractive tax efficiencies within pension wrappers, but it means you don’t technically ‘own’ the underlying assets, the trustees do and therefore, when making a Will, your pension cannot be bequeathed this way.

We make our wishes regarding our pension pots clear to the trustees through a death benefit nomination form, which you can obtain from your pension provider, and this should be regularly reviewed. Although the nomination is not legally binding, it provides a clear expression to the trustees who you would like to benefit from your pension pot.

If there is not a nomination in place, the trustees will use their discretion as to who should benefit from the remaining pot. This could become slightly murky, if you are cohabiting and not married or have recently separated from a partner which are not uncommon circumstances in today’s world. To avoid any doubt, reviewing your nominations regularly should be commonplace.

Recent changes

Following the legislation changes, death benefit from pensions in certain situations have been made incredibly attractive.

You may have seen recent articles which noted the removal of the Lifetime Allowance which has now been replaced by the individual lump sum allowance (ILSA) and the individual lump sum death benefit allowance (ILSDBA). It is worth noting only lump sums are tested against the ILSDBA, not income and there lies the attractiveness of this strategy.

A beneficiary, however, can only benefit from drawdown if they have been nominated and the pension wrapper facilitates this. Only a lump sum is available if they have not been nominated which will be tested against the ILSDBA. If the member leaves residual benefits post age 75, this gives the beneficiaries the opportunity to control how they incur the taxation by controlling when they access the pension, otherwise they will receive the full amount as a lump sum which will be taxed at their marginal rate.

Now there are two main considerations around pension nominations. 

• Are my death benefit nominations in place and up to date? 
• Does my pension facilitate beneficiary drawdown? 
  • Some pensions will not, and only lump sums will be available which will be tested against the above allowance in the event of death pre age 75.

Intergenerational benefits

When assessing the structure of your beneficiaries, due to the attractiveness of drawdown moving forward, it may be prudent to consider intergenerational nominations. An example of this could be: 

• Spouse – 98% 
• Child 1 – 1% 
• Child 2 - 1%

This tiering allows the children to access beneficiary drawdown (if available through the pension scheme) should there be residual pension remaining, i.e. should the spouse not need an income from this arrangement.

This is a key area which should stimulate intergenerational conversations and planning. As you can see from the previous table, post age 75, the tax-free element of the pension will become taxable at the beneficiary’s marginal rate. For a holistic overview, it is worth understanding: 

• your Inheritance Tax (IHT) position 
• the rates of tax your nominated beneficiaries pay.

If for example, your beneficiary is an additional rate taxpayer of 45%, this is a higher rate of tax than IHT currently 40%. If the initial strategy was to retain the pension until death but not touch it due to the IHT efficiency, is it worth accessing that element of your pension earlier and consider gifting it if your beneficiary would pay a higher rate of tax? You should also account for your health status as a financial gift takes seven years to fall outside of your estate.

Summary

Martin Lewis recently did a spotlight on the importance of death benefit nominations with the tag line ‘don’t accidentally leave it to your ex’. Nominations could be overlooked within your personal plan but for the reasons outlined in this article, the value they can add to your situation can be invaluable.

All nominations in lieu of the legislation changes should be reviewed, and I strongly encourage you to consider the intergenerational benefits when looking at the structure of the nominations or when considering your long-term plan.

With regular legislative changes, keeping your financial plan on track is becoming increasingly complex as demonstrated by the wider implications a simple housekeeping task can generate. If you think your plan could benefit from a holistic review, contact us today.

Do you want to know more about the benefits a pension may present in your personal planning? Read more at on our insight covering pension contribution opportunities for partners.