In most circumstances, the state pension alone will not be sufficient to support a comfortable retirement. We, therefore, need to look to support our retirement by contributing to a personal and/or work-based pension scheme. Expert financial adviser Louise Morgan looks at some of the important questions surrounding your pensions.
With our pension pots growing and the auto-enrolment total contributions increasing to 8% in April 2019 (which at least 3% must be paid by the employer), you may be left wondering what will happen to your pension savings if you die.
What will happen to my personal pension pot when I die?
Death benefits can be paid to any beneficiary.
Death before 75
If death occurs before age 75, all benefits (whether taken as a lump sum or income) will be paid out tax-free if designated to a beneficiary within a two-year window (potential tax implications if not designated within a two-year window).
Death after 75
If your dependants elect to take a cash lump sum in the event of your death after age 75, they will be taxed on the lump sum at their highest marginal rate of income.
Whilst having the money paid out may be a benefit to many, there are other more tax-efficient possibilities that have been brought about as a result of recent legislative changes, such as options for any beneficiary to receive the fund value themselves within a new pension.
The benefit of this is that rather than being paid out as cash, the money can stay invested in the tax-efficient pension environment and continue to enjoy investment growth until it is required, known as beneficiary drawdown. If there is no “Dependant” then a nominee or successor can be elected to receive the fund in this way.
Please note, if you have purchased an annuity, like a secure lifetime income, on death your annuity will potentially payout to a spouse if you have selected a spousal benefit when commencing your annuity.
How can I nominate a spouse/child or any other individual to receive my pension in the event of my death?
You can nominate a beneficiary to receive your pension in the event of your death using an expression of wish form which your financial adviser can provide you with on behalf of your pension provider.
As pensions are normally outside of your estate for Inheritance Tax Purposes (IHT) it is important that all potential beneficiaries are listed on your expression of wish form.
There will be times where your nominated beneficiary has pre-deceased you or does not need an income from your pension on your death. In these circumstances, it may be prudent to give alternative nominations to ensure that benefits can still be passed to the people you care about. Your financial adviser can assist you in completing this form and can be updated anytime with changes in circumstances.
Can an expression of wish form assist with inheritance tax planning?
It is generally encouraged that if an individual does not need an income from their pension, then it is best left within the tax-efficient environment as pensions are normally outside of your estate for Inheritance Tax Purposes – this can, therefore, form part of inheritance tax planning.
Whilst the scheme has ultimate discretion on the distribution of funds in the event of your death, nominating a beneficiary(ies) gives the scheme guidance where you would like the money to go to in the event of your death.
Nominating a number of individuals such as your children and then grandchildren can help mitigate a potential immediate income tax charge if you die after age 75. On death, after age 75 the benefits can be drawn down or paid as a lump sum taxed at the beneficiary’s marginal rate. If the are non-taxpayers with no other income, each grandchild can take up to £12,500 out each year (2019/2020 personal allowance) without paying tax.
There is no requirement for them to take any income if they do not need it. If they become a higher rate taxpayer in the future, they could opt to leave the money in a pension until they retire when their tax rate may drop. This is the current position, however, the legislation could change in the future. We would always recommend discussing matters with your financial adviser.
If you would like to speak to Louise or any one of our experienced financial advisers then contact the team on firstname.lastname@example.org