What would you like to happen to the benefits from your pension plans in the event of your death?
Depending on the type of pension plans you have, it is usually possible for you to either complete a nomination form (also referred to as an ‘expression of wish form’) specifying what you would like to happen to your death benefits or to place your death benefits under trust.
With most occupational pension schemes the nomination form is the only option and this will also be the case with some individual pension plans such as personal pensions. The pension plan trustees or administrators have discretion over who they pay death benefits to but the nomination form makes them aware of your wishes and, in normal circumstances, they will usually follow them.
Some older plans such as retirement annuities and buy-out bonds (section 32 plans) may require that a trust wording be completed rather than a nomination form.
We have given more detail on the possible options (in terms of death benefit instructions) below.
Points to consider
In light of the new pension flexibilities for death benefits, including the potential to pass funds down through the generations via flexi-access drawdown, and the possibility of paying death benefits to a far wider range of beneficiaries, it is important to bear in mind that it may be impossible to make use of these options if your pension plan or scheme doesn’t offer them.
It is important to check whether your pension arrangements can be used in the way you would like on your death. If you have pensions that can’t facilitate the new freedoms, for example older pension plans that don’t give your beneficiaries the option of leaving the remaining pension funds in drawdown, your beneficiaries could find that the only option available to them is annuity purchase or to take a lump sum (which may not be the most tax efficient option).
- What would you like to happen to any remaining pension fund on your death?
- Would you like your beneficiaries to have the option of the tax efficiency and flexibility of inherited drawdown?
- Is a secure fixed income from a survivor’s annuity more appealing?
- Would a lump sum death benefit be better directed to a bypass trust where your chosen trustees can have the control over who benefits and when (which could include making loans)?
- Can the existing pension scheme facilitate your preferences? Not all pensions allow lump sum payments to be made to a bypass trust and not all pensions offer inherited drawdown.
Nomination form issues:
- Even where the pension arrangement offers all the new freedoms, it's crucial that nomination forms are kept up to date and fully reflect your wishes.
- A death benefit nomination helps to guide the scheme trustees/administrators when exercising their discretion and they will rely on the most recent nomination form they have received. Nomination forms can normally be changed at any time.
- The new rules around who can inherit make it even more important that nomination forms are correctly completed. If you want someone other than a dependant to inherit and would like them to have the option of inherited drawdown, you must name them on the nomination form – a lump sum can, however, be paid at the trustees’ discretion to a non-dependant even if there is a surviving dependant.
- Issues can also arise where you have completed a nomination form with instructions that the lump sum death benefit is to be paid to a bypass trust. Some nominations to a bypass trust can be made binding upon the scheme administrator, in which case the scheme administrator must follow this instruction and has no discretion to pay to anyone else – such a binding nomination can still be revoked by completing a new nomination.
- In light of the pension freedom changes you will need to decide if a bypass trust is still the right option. Bear in mind that a lump sum paid to a trust if you were to die after age 75 is taxed at 45% initially ( a tax credit can be given to the beneficiary, when the rate paid on the lump sum if paid directly to them at their own tax rate(s) is less than 45%).