Payment of Death Benefits from a Personal Pension
An issue I mention in every Financial Planning Review (ad nauseum some might say!) is to ensure that your ‘Expression of Wish’ (i.e. who receives a share of your pension on your demise) fully reflects your wishes.
This is not just to ensure that those previously nominated still remain a ‘deserving cause’ (sorry, nominated beneficiary!), but to consider whether any additions to the family (often grandchildren) are also included in the list of nominated beneficiaries, if desired.
Furthermore, after the introduction of the ‘pensions freedoms’, expression of wishes which pre-date April 2015 are unlikely to provide 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 funds they inherit from you.
There is a misconception with pensions that anyone can receive a death benefit and in any form. The commonly held view is that it is all down to the discretion of the Trustees of the pension scheme. Therefore, no advance planning is needed as it can all be sorted out on the death of the individual.
Unfortunately, it doesn’t work like that.
There are rules which govern the Trustees’ ability to exercise their discretion. In particular, these rules apply to who may receive a beneficiary’s ‘Flexi-Access Drawdown’ pension, which provides your nominated beneficiary with complete freedom to draw however much they require to precisely match their needs.
The Trustees may only use their discretion for this type of benefit for dependants of the deceased, such as a spouse or child under 23, or anyone nominated by the deceased on their Expression of Wish. The Trustees are not permitted to use their discretion to offer Flexi-Access Drawdown to anyone else, for example, a child over the age of 23 or grandchildren. Therefore, if someone is not nominated, they cannot elect to draw benefits by way of ‘Flexi-Access Drawdown’.
It is often a good idea to include all members of your family who you think you may wish to benefit, such as a grandchild, as this enables the Scheme Trustees to make that benefit available to the grandchild directly, rather than being paid to the parent of the grandchild first who then passes it on to their son or daughter, with possible tax consequences.
Just because a grandchild is a ‘nominated beneficiary’ on your ‘Expression of Wish‘ does not compel the Scheme Trustees to make a payment to them; this will be a matter for discussion with your Executors and the grandchild may ultimately be excluded.
So, when we mention in your Financial Planning Review that you should make sure that your ‘Expression of Wish’ is up to date, please take a few minutes to give it some careful thought; and this applies to your Will too, which should also be regularly reviewed.
In our next Newsletter, we will provide an example of how an uncomplicated but well thought out ‘Expression of Wish‘ can meet the differing needs of all of your beneficiaries, in the most tax efficient way.