This image shows a pension planning document on a clipboard.This is an interesting one as many people believe that if they have a Will in place all of their death planning is taken care of. Well actually a Will has no effect on what happens to your pension if you die. Pensions are dealt with totally separate from the rest of your estate.

This article deals with money purchase pensions, the type that you pay into and the size of the pot depends on how much you have saved and investment performance. Not a final salary pension.

Since pension freedom rules in April 2015, pensions have become a very good Inheritance Tax planning tool.

If you die before age 75 then whoever inherits your pension can choose to take out all of the money in one lump sum or keep it inside a pension and draw out money as and when they need to. There is no Inheritance Tax to pay and no Income Tax on the beneficiary.

If you die after 75 then your beneficiaries can still choose whether to take out a lump sum or drawdown, however they will pay their marginal rate of Income Tax at the time. There is still no Inheritance Tax to pay.

So potentially a pretty generous death benefit for your beneficiaries, but if you can’t deal with pensions via your Will how do you choose who should benefit on your death?This image shows a family tree with blank spaces ready to input who you may want to benefit from your pension on death.

How to choose what happens to your pension if you die

  1. Make sure you record all of your pensions, their current value and which provider they are held with. Keep this updated on a regular basis so your family can easily locate all your pensions if the worst was to happen.
  2. Contact each provider and ask for a ‘nomination of beneficiaries’ form or an ‘expression of wish’ form. Each provider will call it something different.  
  3. Using this form you can specify who you would like to benefit from your pension. It doesn’t have to be one person, you can split it between a few different people e.g. partner and children.
  4. Take a copy of the form and send the original back to the pension providers.
  5. It’s vital to keep the forms under regular review as circumstances change. You don’t want to end up like one client who, when we were reviewing his pension found out that his ex-wife was still nominated to receive his pension death benefits!

For final salary type pensions, the rules are much more restrictive and quite often it is only married partners who can receive pension death benefits. Every scheme is different so it is best to check with the scheme administrator.

If you would like to discuss your own pension death benefit planning or have inherited a pension why not give us a call and take advantage of our free initial consultation.

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