With the revolutionary changes to pension rules in recent years, one key change was the option to choose any beneficiary. The other key change, was how you can pass on your pension pot on death.
Recent research from Royal London has found that the total amount of unclaimed financial assets in the UK range from a conservative £15bn to an eye-popping £77bn, depending on which report you read. With over £5bn sitting in lost pensions, a quick hunt of your plans could make a meaningful difference to your lifestyle in retirement. So make sure your pension goes to the right person by following our guidance below.
Firstly, what are the rules?
Before the changes in April 2015, you were only able to leave your pension to anyone financially dependant on you. Under the new rules you can now leave it to anybody. Pam your hairdresser, Bob your neighbour or Mary your dog walker. Anybody can now inherit your remaining pension fund.
If you are in a Final Salary pension (also known as a ‘Defined Benefit’ scheme), you may not have this choice. These plans are still governed by the rules set out by the pension trustees who look after the plan.
There has been a huge amount of focus on people considering whether to transfer their final salary pensions to an alternative pension. This is often to allow them to pass on their pension on their death to their families rather than just receiving the promised fixed income from their employer. However, this is an area that is complex and professional financial advice is an absolute must.
How are my benefits paid to my beneficiaries if I die?
If you die before the age of 75, your pension pot is paid to your beneficiaries free of tax. Your pension is held in a special trust so that it does not fall into your estate for inheritance tax purposes. This is a HUGE advantage to pension planning as this could save your beneficiaries thousands. They could potentially be paying away 40% of the pot in comparison to being held, for example, in a residential property that fell into your estate.
Also consider that the tax treatment of pensions is different after the age of 75. It could be more beneficial to consider different beneficiaries to the most popular spouse and children.
Post age 75, tax is paid on a pension at the beneficiaries rate of tax. So let’s imagine that a daughter or son inherited the pot and at this time they were a successful IT Consultant earning £60,000 p.a. As a higher rate tax payer, they would pay 40% tax on the benefits.
Therefore post age 75, it may be worth considering changing the beneficiaries to their children instead. Particularly if you intend to pass to them anyway or if you do not require access to it for yourselves.
Next steps – Take Action
- The next move is to give up to date details of your chosen beneficiaries to your provider. This will normally involve using a ‘expression of wish’ form. When completing, quote proportions as percentages rather than fixed sums as you don’t know how much money will remain in your pension when you die. You may have (hopefully!) started using the benefits in retirement. Keep a copy of this form with your will and preferably with a copy given to the executor of your will.
- If you’ve divorced, remarried, had children or your circumstances have changed, request a form and make sure it is up to date.
- Review your pension pots – Rather than filing those statements away, take action
- If you are expecting to be a beneficiary of someone’s pension, and they are approaching age 75, encourage them to speak to a financial planner to understand more about their choices. It could save them and you thousands of pounds by making some decisions before it is too late.
- Don’t be scammed! If you’re approached or contacted by a company claiming to be a Pension transfer expert, make sure they are on the FCA (Financial Conduct Authority) register.
- Consider a pension review to ensure they remain competitive. They may not be invested in the right way to suit your attitude to risk. Or it may be sitting in expensive funds that could be performing better. Think of them like your mortgage or your credit card – review them regularly.
What else should I consider?
- Have you changed jobs? It is time to review your pensions. This will allow you to make the necessary adjustments to any contributions you may wish to make into your new scheme.
- Set up your own pension if you are self-employed. Being self employed does not have the advantage of an employers contributions, so it’s even more important to set up your own arrangements. Want to understand pensions better? Read our previous blog on Why you should have a pension
- Gather all your details together – This includes details about any state pension benefits. This is useful to get a better understanding of how much you may have in the future based on your National Insurance contributions. Request a State forecast by completing a ‘BR19 form’ on the HMRC website. However, it will not be a surprise to know that you should not solely rely on these benefits. The age at which you can take these benefits are being pushed further and further back.
- Maintain contact with your money coach or financial adviser? Sadly, I speak to lots of people whose financial advisers are charging them an ‘ongoing advice fee’ that comes from their savings pot each year, which should be paying for a regular review. This can over time be a very costly error. I coached a client last week had not reviewed their pension for 8 years with their financial adviser. The client had just filed their review letter away every year, ignored their adviser contact and with an adviser fee of 1% being taken from his pension each year, on a pension pot of £60,000, that is a whopping £4,800. Regular reviews with your adviser are a must and should not be ignored.
- There is a free pension tracing service available to help you locate any lost pensions.
Do I need to do this even if I have a will?
Yes! It will not form part of your will so it’s important to make sure you have competed a nomination form. Many of them have these forms online now for ease of completion.
Whilst a will may provide a good indication of how you want your money to be distributed when you die, following the pension changes, this may not always be the case.
Retirement planning is an important and vital part of any financial plan. We strongly recommend that you seek advice or further guidance in this area.
Useful contacts
Check you are not being scammed – FCA Register: https://www.fca.org.uk/firms/financial-services-register
Check your State pension benefits (BR19 form): https://www.tax.service.gov.uk/check-your-state-pension
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