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Pension Expression of Wishes – Sometimes the smallest details matters the most

19 May 2020

Swaati Taylor, Wealth Planner

Legislative change

The April 2015 Pension Act introduced significant reforms around the taxation of death benefits and removed previous restrictions to allow individuals to devolve their pension arrangements as they wish.

Broadly the legislation allows:

  • A member of a defined contribution pension to nominate any beneficiary, not just financial dependants; and
  • That beneficiary can take benefits as they choose either as a lump sum, an annuity or via a beneficiary's pension.

The precise tax treatment upon receipt of funds in the beneficiary's hands depends upon the age of the member upon death and the option the beneficiary decides to take.

What is a beneficiary's pension?

A beneficiary's pension is effectively a drawdown pension which allows the beneficiary to draw on the funds as and when required, whilst maintaining the tax efficient pension wrapper. The key advantage is that it keeps the pension outside of the scope of inheritance tax as it passes through the generations, rather than the beneficiary being forced to take the funds as a lump sum or annuity at outset which would restrict the ability to maximise the tax efficiencies available.

 There are several other notable advantages to a beneficiary's pension, such as:

  • The beneficiary can draw on this pension at any age, and does not need to wait until age 55 (increasing to 57 in 2028) like they have to with their own pensions;
  • There are no restrictions on the level of withdrawals that can be taken i.e. the nominated beneficiary can take the whole fund at once if they want or not take any benefits at all;
  • The funds can be retained in the drawdown facility indefinitely, and based on current legislation would benefit from no UK taxation on income and gains whilst within the facility;
  • Where the beneficiary has sufficient assets and resources outside of the inherited pension, it makes sense to retain the drawdown facility untouched to accrue tax-efficiently on a longer-term basis;
  • As the beneficiary's pension is not taxed on an arising basis, the beneficiary's pension can grow unrestricted by tax and can be used to strategically supplement income as and when required.
  • A beneficiary's pension does not form part of the recipient's own pensions and therefore has no impact on their individual lifetime allowance or pension planning;

Why should we review these now?

It is important to understand that not all pension providers offer the flexibility that the above legislation allows. If a beneficiary's pension is not offered by your existing provider, then on death of the pension holder the options available to the beneficiaries become limited (typically to a lump sum payment or the purchase of an annuity).

This means that the pension fund would enter the estate of the recipient for future IHT purposes (when paid as a lump sum) or disappears for future generations (as an annuity would cease on the death of the beneficiary or their spouse depending on the terms of the annuity).

Where the provider does not offer this facility, it is important to note that on the pension holder's death, the scheme is bound to settling the death claim and would not be able to transfer the pension to another scheme which may offer a beneficiary's pension.

I have a SIPP, I should be okay?

Whilst a SIPP would typically offer beneficiary's drawdown, the key point to check is whether there is an Expression of Wishes lodged and if this Expression of Wishes allows the flexibility to benefit from all the possible options available.

Do you have an Expression of Wishes lodged, and when was it last updated?

Pension providers have seen an increase in requests for the use of beneficiary pensions and as such a number of them have been updating and improving the flexibility of their Expression of Wishes forms over the last couple of years. For this reason, if this form has not been reviewed in the last 12-18 months, it's likely that the Expression of Wishes lodged with the pension provider does not maximise the flexibility to pass the pension down to alternative family members, via a beneficiary's pension, and subsequently onto future generations in the most tax efficient manner.

We have provided a few case studies overleaf which demonstrate the importance of having a valid and current Expression of Wishes form lodged with the pension provider that accurately reflects how you would wish your pension funds to devolve.

Qualifying criteria for a beneficiary's pension

It is important to note that to be able to receive a beneficiary's pension the recipient must be either a "Dependant" or a "Nominee" (i.e. anyone who has been expressly nominated by the pension member/holder other than a dependant)

For the purposes of a beneficiary's pension, a dependant would be classified as follows:

  • Spouse / civil partner of the member;
  • Child of the member under age 23, or a child 23 or over who is dependent due to a physical or mental impairment;
  • Any other individual who was either dependent on the member, in a mutually dependent relationship with the member, or dependent on the member due to a physical or mental impairment.

 The pension provider may also nominate a "Nominee", but only in the situation where there are no living dependants (as classified above) and there is no valid Expression of Wishes.

The beneficiary's pension can then be passed on to a "Successor" on the original beneficiary's death. For a successor to receive the beneficiary's pension they must be expressly named by the originally nominated beneficiary via an Expression of Wishes. In the event that no Expression of Wishes have been made by the original beneficiary, then the scheme administrators can nominate a successor(s). In this situation the administrators would be allowed to nominate any individual or charity, and they are not restricted by living dependants.

Case studies

We have provided below a few fictitious case studies (based on real life examples) which help bring to light the reason why this one form is extremely important and why it pays to review it regularly.

Married with children – Adam and Anne Smith

Adam Smith sadly passes away before age 75, and leaves behind his spouse, Anne Smith, and three children; Ben, Charlotte and David (who are all over the age of 23). Adam had lodged an Expression of Wishes nominating Anne as the sole beneficiary.

Anne, based on the value of the other assets she has inherited, has decided she does not require all of the pension fund and she asks the scheme administrators to allocate a proportion of the pension's death benefits to her three children now, rather than waiting until after her death for them to inherit the pension fund as successors.

As there is still a financial dependant alive following Adam's death (Anne) and she was also expressly nominated on the form, the scheme administrators were not able to nominate the children to benefit from a beneficiary's pension with a proportion of the pension fund.

While Anne can withdraw funds from the pension free of tax and gift the funds to her children, these gift(s) may be liable to inheritance tax in the future if Anne does not survive 7 years. In addition, if Anne now dies after age 75, the beneficiary pension that will pass on to her children, will now be taxed at their marginal rate on future withdrawals.

If Adam had nominated his children as "alternative beneficiaries" then the pension administrators would have been able to offer the children a beneficiary's pension, allowing them to draw on the pension free of tax when required during their lifetime. 3/3

Single grandparent, adult child and one grandchild – Edward, Fred and Georgia White

Edward White is a single father who had named his only son, Fred White, as his sole beneficiary. Fred is 36 years old and an additional rate tax payer and will be for many years. Fred has a daughter, Georgia White (Edward's granddaughter), who is 6 years old and has recently started at private school.

Edward unfortunately passes away over the age of 75. Fred, as the sole beneficiary, realises that any withdrawals he makes from the pension (lump sum or via a beneficiary pension) would now be taxable at his marginal rate (i.e. additional rate tax). As he does not require the funds, he asks the pension administrators if they could consider paying the benefits directly to Georgia (Edward's granddaughter) as a beneficiary's pension, knowing that withdrawals in her name could be made free of tax up to her personal allowance each tax year and could be used to fund school fees.

In this scenario, Edward had no financial dependants but he has made a valid Expression of Wishes. As such, the pension administrators cannot bypass Edward's original nomination.

If Edward had listed Georgia as an "alternative beneficiary" then the pension administrators would have been able to consider Fred's request, which would have allowed withdrawals from the pension to be as tax efficient as possible.

Divorced, re-married and children – The Wright Family

Harry Wright was previously married to Sally Wright, with whom he has two adult children, Luke and Matilda Wright, who are 29 and 35 respectively. Harry divorced Sally 7 years ago, and married Daisy Wright 3 years ago. Harry and Daisy have a daughter called Lucy Wright who is 2 years old.

Prior to Harry's divorce he had an Expression of Wishes lodged with his pension provider, which nominated 100% of his pension benefits to Sally (his spouse at the time). When Harry married Daisy they both put in place new Wills, but Harry had forgotten to update his Expression of Wishes.

Harry sadly passed away last month, under the age of 75. Following discussions with Luke, the pension administrators are made aware of the change in circumstances and are informed that his mother, Sally, had also passed away several years ago. As such, the current Expression of Wishes would no longer be valid.

Having consulted with all members of the family, the pension administrators are able to provide the following options:

  1. Provide a beneficiary's pension to Daisy (Harry's spouse at the time of his death) – as she is classed as a dependant.
  2. Provide a beneficiary's pension to Lucy – as she is also classed as a dependant (under the age of 23).
  3. Provide the option of a lump sum or annuity purchase to Luke and Matilda

As Luke and Matilda are both over the age of 23 they are not classed as dependants. While there was no valid expression of wishes at the time of Harry's death, he did leave behind dependants (Daisy and Lucy) and, as such, the pension administrators are not able to nominate Luke and Matilda to benefit from the beneficiary's pension option. As Harry died before Age 75, the benefits that Luke and Matilda receive would be free of tax. However, the pension funds would now form part of their estate for future inheritance tax purposes and could not be passed on to future generations via the tax efficient pension wrapper.

If Harry had updated his expression of wishes and listed Daisy as his primary beneficiary, and his three children as alternative beneficiaries they would all have been able to potentially benefit from a beneficiary's pension option.

It is important to remember that the payment of pension death benefits is always at the scheme's discretion and they do not have to follow a member's Expression of Wishes. However, the Expression of Wishes does provide clear guidance on the member's intentions and also provides the flexibility for named beneficiaries to receive a beneficiary's drawdown.