We have covered death in service benefits in the NHS pensions scheme in previous articles, but what happens to your private pensions on your death? How do you ensure they pass to the people you want them to, and what tax will they pay on these pensions?
This article is useful for anyone who has contributed to a personal pension, for instance, in respect of private earnings, or for any spouses with company money purchase occupational schemes from current or previous jobs.
Why pensions are so tax-efficient
Pensions are highly tax-efficient investments. You receive tax relief at your highest rate on contributions, plus, when accessing your money, you can take out 25% of your fund tax-free up to certain limits, with the remainder being liable for income tax at the individual’s highest marginal rate.
Normally, pensions do not fall within an estate for inheritance tax purposes. So, holding pensions means your beneficiaries will also benefit by not having to pay inheritance tax.
Great news! However, you must be mindful to make arrangements with your pension provider and fill in essential additional paperwork to let them know who you want to benefit from your pension on your death. These additional documents are called an ‘expression of wish’ or a ‘nomination of beneficiaries’ form.
Beneficiary Designation/Nomination of Beneficiaries
It’s essential to keep your beneficiary designations up to date. Especially so, if you have a change in circumstance – you divorce and remarry, or you have a favourite child – if you don’t update your nomination with your pension provider, on your death the benefit could go to unintended beneficiaries.
We often recommend that clients consider nominating children or even grandchildren as well as spouses, even if it’s only 1%. This may allow a variation if the primary beneficiary doesn’t wish to accept the funds and can re-allocate them to the children or grandchildren. Where the children or grandchildren are non-taxpayers, this could allow funds to be paid tax-free. It is worth noting not all providers facilitate this, so do check.
Expression of Wishes
An ‘Expression of Wishes’ document helps guide your pension provider on how you’d like your benefits distributed. While it’s not legally binding, providers often consider it when deciding how to distribute the benefits.
What about old pensions?
What about old pensions you have accrued with past employers? Have you updated your beneficiaries with them? If you have a collection of old pensions, you may consider amalgamating them into one place to help with this. However, before doing so, take specialist financial advice to ensure you do not lose special benefits any pension provider offers, and that your costs will remain appropriate. Get in touch if you want to learn more about this.
Keep your Will up to date
Of course, you also need to keep your Will up-to-date. Although a Will doesn’t direct your pensions and who they go to, it can confirm your intention and help resolve any disputes that could arise when you’re not here.
Will there be any tax to pay on your pension when you die?
You should be aware there could be some tax implications associated with passing your pensions onto your beneficiaries.
Although the Lifetime Allowance is due to be abolished in April 2024, the new allowance called the Lump Sum Death Benefit allowance is being introduced, which coincidentally, is at the same figure as the current Lifetime Allowance of £1,073,100.
This Lump Sum Death Benefit has no impact if you pass away post-age 75, as the proposals are the same as current rules where beneficiaries will pay tax at their highest marginal rate.
The suggestion is that post-April 2024, any benefits in excess of the Lump Sum Death Benefit allowance will be taxed at the beneficiaries’ highest marginal tax. Hence, this is not as favourable as the previous system.
You may also have a higher Lump Sum Death Benefit allowance if you have certain protections in place.
Review your personal pensions
We recommend you review all your personal pensions to ensure they will offer you all the flexibility you require in later life. Not all pensions allow flexible access to lump sums and income. You need to be mindful of this when planning for the future and ensure your pensions fit your plans.
As always, these things are more complex than we would like and your past Lifetime Allowance figure will remain slightly confusingly an important figure even after it is fully abolished in April 2024.
However, the complexity of this issue highlights the importance of taking experienced, qualified advice regarding your finances.
Annuities
Please note this article does not apply to Annuities. If you have purchased an Annuity please see your adviser for the implications and the situation on death as these can vary according to the type of Annuity you purchased.
Tax is dependent on your own circumstances and personal situation, and is subject to changes based on UK legislation and taxation regime. This article is based on our understanding of current legislation and does not constitute advice.
Were you aware that you need to nominate your beneficiaries in your pension? Let us know by adding a comment below.
This article was written in cohort by Max Spurgeon and Kirsty McGaun.