Channelling Pension Funds to the Right Beneficiary

Within our last Newsletter, I mentioned the importance of ensuring that the ‘Expression of Wish’ in relation to your Personal Pension is completed in such a way as to give the Scheme Administrators and Trustees (in essence, the pension company) the freedom to follow the exact preferences of your surviving family members to elect to receive either a regular income, lump sum or combination of the two from the pension fund they inherit from you.

It is after your demise that the next valuable element of advice comes into play: how much do your beneficiaries wish to withdraw and when?

Firstly, someone should only be withdrawing benefits from their beneficiary ‘Flexi-Access Drawdown’ when they need to. It would be foolish to make withdrawals and for that money to remain in their bank account over the long term. After all, it would then be in their estate (so potentially liable for Inheritance Tax) and any interest earned is assessed for Income Tax. Nevertheless, this is sadly what many people do, particularly those without a financial planner.

Also, if too much is withdrawn in a particular tax year, the rate of Income Tax they pay could be as high as 40% or even 45% (this assumes the original pension holder has died after the age of 75). Again, financial advice makes a real difference here.

Let’s consider the example of someone who has died at the age of 80 with £200,000 remaining in their Personal Pension.

These funds could, with the correct nomination, be used in a variety of ways between, say, their spouse, only child (older than 23), and two grandchildren.

The spouse could take regular withdrawals, perhaps at a modest level, from their share to meet household expenditure.

The adult child could defer making any withdrawals for now, because he or she has a well-paid job, does not need the funds and/or would pay Income Tax on such withdrawals at 40% or 45%.

The two grandchildren could withdraw amounts up to their personal allowance (£12,500 in the 2020/21 tax year) to fund education fees.

This is a very different, and valuable, outcome following advice, compared to one where the spouse was obliged to receive all of the remaining pension fund and withdrew it in one lump sum to put it in their cash savings account, but it all stems from having the correct ‘Expression of Wish’ in place in the first instance.