Pension death benefits – does your pension plan allow for the new flexibilities?

In light of the new pension flexibilities for death benefits – i.e. the facility 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 the pension plan or scheme doesn’t offer them.

It has never been more important to check whether your pension arrangements can be used in the way you would like on death as it may be too late to do anything about it once you have passed away. If you have pensions that can’t facilitate the new freedoms, for example older pension plans that don’t give the option of dependant’s/nominee’s drawdown (inherited drawdown), the beneficiaries could find that the only option available to them is annuity purchase or to take a lump sum (which is unlikely to be the most tax efficient method of extraction – the lump sum doesn’t have to be particularly large for at least some of it to be taxed at 40%).

It is also crucial that death benefit nomination forms / expression of wish forms are kept up to date as, although not binding, the scheme trustees/administrators will usually follow the member’s wishes.

It has never been more important to have a modern flexible pension that will facilitate the full range of death benefit options and to keep death benefit nominations up to date as part of regular client reviews.

To ensure thatensure that death benefits can be paid in the desired format to the right beneficiaries, there are some important point to consider:

Points to consider:

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
When Completing a nomination/expression of wish form (referred to as nomination forms below), the following factors should be appraised.
- 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 as if you want someone other than a dependant (ie. a nominee) to inherit and would like them to have the option of inherited drawdown, you must name them on the nomination form in order for this to be a possibility if survived by a dependant. The scheme trustees/administrator cannot exercise their discretion to offer a non-dependant the inherited drawdown option if there is a surviving dependant unless the deceased had nominated the non-dependant during their lifetime. This doesn’t apply to payment of a lump sum death benefit – a lump sum can be paid at the trustees’ discretion to a non-dependant even if there is a surviving dependant
- Issues can also arise where members have completed a nomination form with instructions that the lump sum death benefit 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 members will need to decide if a bypass trust is still the right option. Bear in mind that a lump sum paid to a trust post 75 is still taxed at 45% at outset so only 55% of the fund passes into the trust, although when a payment is made to a beneficiary this comes with a 45% tax credit that can be offset against the beneficiary’s own tax bill

Professional advice is critical, so that you can take advantage of the New Pension Freedoms, both now, for you to enjoy and after death as youyour legacy to your chosen beneficiaries.

If you have old pension contracts that have not been reviewed recently, it could be in your interests to have these reviewed by an Independent Financial Adviser and one of our pension specialists at Odyssey Wealth Management will be delighted to help.

The information contained within this article is for information purposes only and does not constitute advice. You should seek professional advice before entering into any contract. This information is based on our current understanding of legislation which is subject to the change.

The value of tax reliefs depends on your individual circumstances and can change.

The Financial Conduct Authority does not regulate tax and trust advice

Pension Death Benefits – does your pension plan allow for the new flexibilities?

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