Weekly Update June Monday 14th 2021
How to help clients pass on pension benefits
Your clients will want you to discuss their pension death benefit nomination forms with them. They just might not know it yet. There has been an increase in the number of people updating their wills since the pandemic hit, which is a positive trend. But what about the many clients and prospective clients who don’t have their pension death benefit nominations up to date?
What is the best practice advice for planners on how to discuss this with clients and guide them through when to nominate, when to sort out legacy arrangements and how to work with solicitors? This article aims to discuss some of the pitfalls and possible planning paths for clients. What are the pitfalls of not having your pension death benefits nomination up to date?
The Law Society Gazette and the STEP Journal reported in 2020 that there had been an increase in people wanting to write or amend their wills at the start of Covid-19. Indeed, some legal firms claimed a jump in demand of up to 76 per cent. And tells us that the pandemic has sharply focused people’s minds on making sure that their affairs are in order and that their wealth is transferred to the right beneficiaries should the worst happen. A pension makes cascading residual wealth to loved ones and future generations possible and can be very tax-efficient, because many pension funds fall outside the estate of the plan-holder on death and do not suffer from inheritance tax liabilities.
Making nominations is important to ensure that your wishes to leave a legacy are clear. Without a nomination, the benefit options on death are significantly reduced.
How do death benefits get paid?
Following pension freedoms, passing on one’s pension wealth has become a much more viable option. Members of a defined benefit scheme (also known as final salary) will be subject to their pension scheme rules, so the pension is usually only paid to a dependant of the person who died, usually a spouse or civil partner or a child under the age of 23.
When it comes to defined contribution pension schemes, sometimes called money purchase schemes, there are three things that can be done with a pension upon death: it can be paid as a lump sum; the beneficiary can take over the pension and withdraw as much or as little as they want (drawdown); or they can buy an annuity. Pension assets typically sit outside of a person’s estate, but this does not mean the pension transfer is free of tax necessarily.
Scheme rules
Another key point people need to understand is that, although the law allows for family members to inherit a pension, it is not every pension scheme that allows for this flexibility.
Under a DC pension, most plans will operate a simple expression of wish, which is a non-binding expression to the trustees that the settlor wishes for the funds in their trust-based pension to be passed to that stated individual.
Due to the structure of the trust-based pension, the benefits are held outside of the estate. The death claim process involves firstly informing the provider of the death of the scheme member, at which point the provider will determine if there’s been a lifetime allowance excess.
Assuming there has not been, the trustees will then seek information from the executors to establish who should benefit from the pension, normally asking for a will or the member’s family information, and then will align this information to that outlined on the expression of wish.
Once they themselves elect to agree with the expression of wish, the provider will send an official confirmation to the beneficiary outlining their options for the amount elected to them. This will either be given as a cash sum direct to the bank or a nominee drawdown arrangement – effectively a continuation of the pension in the beneficiary’s name.
If the pension scheme member passed away before they turned 75, and this process completes within two years, regardless of the option selected, the funds will be paid tax-free, though if the member passed after age 75 then the funds will be subject to income tax at the beneficiary’s rate.
Lack of planning threatens care provision
There is a three-fold challenge when it comes to planning for care: an under-supply of facilities, The managing director of UK care advisory service Grace Consulting said it had become increasingly clear that families were in desperate need of advice when it comes to long-term care provision.
But with retirement incomes stretched and a lack of affordable options available, it is warned that unless people make preparation way in advance of retirement, they will face difficulties at the point of needing care.
In the next 20 years, our population will age. Age UK’s 2019 briefing stated there would be 50 per cent more people aged 65 and over, and 93 per cent more people aged over 85.
What is the average cost for a care advisory service?
Packages range from £295 to £2,450. However, investors in Ingenious Estate Planning benefit from our most comprehensive service, for themselves and their families, at no cost.