Whilst it’s not the most popular topic, planning for the future means considering your pension situation in the event of the death of yourself or your spouse. Many people wonder whether pensions end at death and sometimes assume it goes to your next of kin. Our expert financial adviser Louise Morgan sheds some light on this topic and answers some of the questions we’re often asked.
What will happen to my pension when I die?
It depends on your age.
Death before your 75th birthday
If death occurs before the age of 75 is reached, all benefits will be paid out tax-free if designated to a beneficiary within a two-year window. There are potential tax implications if a beneficiary is not designated within a two-year window.
Death after your 75th birthday
Your designated beneficiary can elect to take a cash lump sum and they will be taxed on this at their highest marginal rate of income. However, there are other, more tax-efficient options available.
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.
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 they are non-taxpayers with no other income, each grandchild can take up to £12,500 each tax 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