Will your pension death benefits end up in the right hands, at the right time in the right way?
Many of us value the ability to pass our unused Personal Pension funds on to our spouse or surviving family.
Others even chose to avoid accessing their pension funds within their lifetimes, using them as an effective wealth transfer vehicle given that pension death benefits are generally free of Inheritance Tax.
Death benefits may be paid out as a lump sum or transferred to an Income Drawdown pension to retain the tax efficiencies pensions offer, which may reduce or eliminate any tax liability for your beneficiaries in their lifetimes.
In turn they can subsequently pass unused pensions on again following their death, with the same or potentially improved tax benefits.
Whilst any beneficiary may receive a lump sum death benefit, transferring the death benefits to an Income Drawdown pension is not so straight forward.
The option to use a Dependents or Beneficiaries Drawdown Pension will depend on the rules of your pension scheme and what has been stated on your Death Benefits Nomination form, assuming you have completed one in the first place.
Firstly, Pension Schemes do not have to offer a Beneficiaries Drawdown Pension, and many don’t.
Whilst the Trustees may hold ultimate discretion on who to award these benefits to, the option to use a Beneficiaries Drawdown arrangement may be governed by who is named on your Death Benefit nomination form.
If you leave a Dependant, such as a surviving spouse, then in order to enable some or all of your Pension to be left as a drawdown arrangement to someone else, such as adult children, there needs to be a valid death benefit nomination. If no nomination exists, then a lump sum death benefit is the only option available to the Trustees.
I have seen these technicalities restrict this valuable option, often resulting in higher immediate or future tax liabilities than needed to have been paid.
This can cost your beneficiaries money, especially in cases where a Lifetime Allowance Excess Tax Charge is payable, or where a surviving spouse wishes to immediately forego the available death benefits in favour of children via a transfer to a drawdown pension.
Death Benefit Nominations are just that, nominations. They are in most cases non-binding on the Trustees, and you may have even less control on the future destination of the death benefits from your pension when the initial beneficiary dies.
I have seen this issue raise concern in a number of situations. Consider those of us who have married more than once with children from a previous relationship. Can you ever be 100% confident that any unused death benefit left to your surviving spouse will be passed on following their death in line with your wishes.
How can you be certain that your spouse will not remarry or bypass your children in favour of their own?
If this is a concern then you may not only need to consider your Death Benefit Nominations more wisely, but you should also consider the benefits of a Spousal By-Pass Trust to ensure your hard-earned pension benefits ultimately end up in the right hands.
So next time you review your Pensions with your financial adviser, take a little time to understand the death benefits available and ensure your unused pension funds end up in the right hands at the right time in the right way.
If any of these issues affect you, then please contact me on +44 (0)1227 768231 or provide your details on our online enquiry form.
The content of this article is for information only and does not constitute formal financial advice.
This material is for general information only and does not constitute investment, tax, legal or other forms of advice.
You should not rely on this information to make, or refrain from making any decisions.
Always obtain independent, professional advice for your own particular situation.
Kreston Reeves Financial Planning Limited, Independent Financial Advisers. Authorised and regulated by the Financial Conduct Authority.
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