There is often focus on the importance of making and updating a will, although where pension pots fall outside of someone’s estate, it can be equally important to have up-to-date expressions of wishes.
But as savers potentially accumulate multiple pension pots, it is likely that expressions of wishes are out of date, says BRI Wealth Management paraplanner Melissa Henderson.
“We often see older pensions from new clients that have been in existence for many years,” she says. “And they either do not have an expression of wish in place, or it can sometimes reflect their circumstances from 20 years ago, such as a previous relationship.”
As well as changes in personal circumstances, Kingswood wealth planner Alex Holloran highlights the possibility that existing expressions of wishes were set up before pension flexibility rules.
If there is no expression of wish
Although an expression of wish is ultimately not binding on trustees, without one they could be left in the dark.
“Scheme administrators/trustees will complete their own investigations following death, and ultimately use their discretion,” says Abrdn technical manager, Dave Downie. “But often they will follow the instructions in the nomination, unless there’s good reason not to.”
Without an expression of wishes, administrators could consider any dependants or beneficiaries of a will. “However, [the will] may not reflect what the deceased intended for their pension funds, so an expression of wish should always be kept up to date,” Henderson notes.
Besides the possibility of a pension being inherited by somebody who the saver did not have in mind, a lack of nomination could affect how the funds can be inherited.
“Non-dependant beneficiaries, such as the deceased’s adult children, may not be able to benefit from inherited drawdown if they haven’t been nominated and there are dependent beneficiaries such as a surviving spouse, leaving a lump sum as the only option for the children,” says Downie at Abrdn.
An invitation for income tax
A lack of nomination could therefore affect how much tax is due. “Income tax is generally only payable on pension death benefits if the original scheme member died after the age of 75. But also, how the death benefits are paid will determine whether income tax can be managed or not,” adds Downie.
“Lump sum death benefits will all be taxable in the tax year of receipt, which could result in much of the payment being taxed at 40 per cent or 45 per cent, and the loss of the personal allowance if income is pushed over £100,000.
“Inherited drawdown, on the other hand, allows income to be taken over many years, meaning it is easier to keep levels within those important thresholds to limit the amount of tax payable at higher or additional rates, and retain personal allowances.
“This is why ensuring nominations are up to date and giving the trustees/administrators the maximum flexibility on how benefits can be paid by specifically naming any non-dependant beneficiaries is so important.”
While plans that offer beneficiary drawdown enable any income tax payable to be mitigated, not all plans offer the flexibility, and it is something that advisers and pension holders should check, says Henderson at BRI Wealth Management.
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