Understanding Pension Death Benefits: Why They Matter in Estate Planning

Pension savings account for more than 40% of total wealth in the UK. For many individuals, their pension pot may even be worth more than their family home. Despite this, people often pay more attention to their non-pension assets when planning for their estate after death. This could be because property and investments comprised in estates are exposed to Inheritance Tax (IHT), while pension savings are generally outside the estate.

However, it's crucial to understand that your pension doesn't automatically form part of your estate and is therefore settled by nomination. This means that you can specify who you want to receive your pension benefits after your death.

The first step in ensuring that your pension benefits reach the right beneficiaries at the right time is to make the correct nominations. Most pension death benefits don't form part of the estate and will not be dealt with by the executors. Instead, the benefits are normally paid at the discretion of the trustees or scheme administrator. However, a death benefit nomination can be made to help guide the scheme trustees/administrators when exercising their discretion.

It's important to note that even where a client is in a scheme which offers all the retirement and death benefit options, this doesn’t mean that all beneficiaries will automatically have all the options available to them. For instance, dependants will have the choice of a lump sum or a pension (via an annuity or inherited drawdown). However, nominations are normally required where non-dependant beneficiaries are involved.

If a non-dependant hasn't been nominated, they can only receive a lump sum if the trustees or scheme administrator decides that they should benefit. This is why it's crucial to nominate non-dependant beneficiaries, such as adult children, to avoid a large income tax bill on a one-off lump sum should the member die after their 75th birthday.

It's also critical to make sure your wishes are clear. Adding some wording to the expression of wishes form to give some flexibility can make sense. For example, you might want to explain your wishes should your spouse predecease you or die at the same time, or to keep the option for inherited drawdown for non-dependants open.

Where a minor is nominated as a beneficiary, it will be their legal guardian - typically a parent - who will have control of the funds, for the child’s sole use and benefit, until they have ‘legal capacity’ (age 18, or 16 in Scotland). If you have concerns about this, you may consider nominating a lump sum to a bypass trust, or a trust created in your will.

Lastly, it's important to review your nominations regularly to ensure that they continue to be in line with your wishes and the needs of your beneficiaries, whilst providing tax efficiency.

In summary, pension savings form a significant proportion of personal wealth for many clients and therefore demand serious consideration when it comes to wealth transfer. Regular reviews are essential to ensure that your current wishes are clearly communicated to providers.

Don't leave your pension benefits to chance. Reach out to me today, and let's start your estate planning journey. Together, we can ensure that your wishes are clearly articulated and legally binding, providing peace of mind for you and your loved ones.