“Who gets my pension when I die?” is a question we get asked a lot.
Huge changes to the pension rules in recent years have had some unforeseen effects. One really important change is the option to choose anyone and that really is anyone (from your neighbour to the postman and beyond) to get your pension on your death.
The other major change was in how you can pass on your pension pot when you die.
Does your ex-husband still get your pension?
Well, he might well do! But not if you change who you leave your pension to.
So, first things first, dig out all your old paperwork and make sure you know where your old pensions are.
Update the address, if necessary. Then make sure your pension goes to the person you want it to.
What are the rules about who inherits your pension?
Before the changes in April 2015, you were only able to leave your pension to anyone financially dependent on you. Under the new rules you can now leave it to anybody. I’ll say that again: anybody at all can now inherit your remaining pension fund.
Exceptions to this general rule are if you are in a Final Salary pension (also known as a ‘Defined Benefit’ scheme). Then 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. The main reason for 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 incredibly complex and professional financial advice is an absolute must.
How is my pension paid to my beneficiaries when I die?
If you die before the age of 75, your pension pot is paid to your beneficiaries free of tax. This is a HUGE advantage to pension planning as this could save your beneficiaries thousands in Inheritance Tax. Inheritance tax is payable at 40% over the Nil Rate band. Everyone has a Nil Rate Band that is exactly that, a band of money of £325,000 that is subject to a Nil or 0% rate of Inheritance Tax.
If you die after the age of 75, tax is paid on a pension at the beneficiary’s 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 a year. As a higher rate tax payer, they would pay 40% tax on the benefits.
Therefore, after age 75, it may be worth considering changing the beneficiaries of your pension to your grandchildren 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 pension provider. This will normally involve using an ‘expression of wish’ form. When you complete it, use percentages rather than fixed £ amounts as you don’t know how much money will still be 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. You absolutely don’t want your hard-earned pension pot to go to the wrong person.
- 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. The link is here.
- Consider a pension review. It is important that your pensions are competitive. One or more may not be invested in the right way to suit your attitude to risk. Or may be sitting in expensive funds that could be performing better. Think of your pensions like your credit cards – review them regularly.
What else should I consider?
- Have you changed jobs? It is time to review your pension. This will allow you to make changes to any contributions you may wish to make into your new scheme.
- Self employed? Set up a personal pension. Being self-employed does not have the advantage of an employer’s contributions, so it’s even more important to set up your own arrangements.
- Gather all your details together and get an idea of how much you are likely to have as an income in retirement. This includes details about any state pension benefits. You can request a State Pension 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 State benefits is being pushed further and further back.
- Do you need to find a lost pension? There is a free pension tracing service available to help you locate any lost pensions. Find it here.
Do I need to do this even if I have a will?
Yes! How your pension is passed on is not covered by your Will. Therefore it’s important to make sure you have competed a nomination form. Many pension companies them have these forms online now which makes it easier.
While a will may provide a good indication of how you want your money to be distributed when you die. However, this may not always be the case following the pension changes.
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.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested. HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.