Be careful what you 'wish' for... Part 2

The Exchange

The information contained in this page is for professional Financial Adviser use only.

In last month’s article I looked at the impact that the introduction of the current pension death benefit rules in April 2015 has had. It led to a significant change in the way these funds can be left, very tax efficiently, and used as an inter-generational source of income. With flexibility comes complexity so some straightforward steps can help and one of the key areas for consideration is the Expression of Wish (EoW) form.

It is important to understand the process the scheme administrator follows when looking at the distribution of any benefits on death. I am part of a committee within Ascentric that looks at claims and time after time we see the importance of ensuring the information supplied is correct. As well as identifying any conflict between the will and the EoW engaging with the adviser, Executors etc to gain a clearer understanding is crucial.

Expression of Wish forms

With the EoW being such a key document at the time of death how can it be worded to allow the flexibility required? EoW forms don't have to be on pre-printed product provider forms. The member can produce their own form in order to let the scheme administrator know what their wishes are. However, care is needed as to how an EoW form is worded. Best practice is to name the “potential” beneficiaries, but not to put percentages down against them. Many provider computer systems might need percentages, however this need for a percentage does not cause a problem as the system will be able to store the original EoW in most cases.

An example of potential and suitable wording for an EoW form could be:

"In the event of my death I would like the trustees to consider making a payment to my spouse, XXXX but would also like to nominate my son YYYY and my daughter ZZZZ so that they may receive a drawdown pension in the event the trustees decide, at their discretion, to make payment to one or both/all of them.

I understand that, in the course of exercising your discretionary powers regards the distribution of my pension death benefits, (insert Scheme Administrator name) will consult with relevant parties, which may include my spouse, my personal representatives  and my financial adviser, as to who they believe should potentially benefit, and in what proportions.

This would hopefully cover the situation where the spouse decides that they do not want the pension benefits on the member's death and would rather the children receive them, in addition to the situation of the spouse dying before the member.

In reality if the spouse does die before the member, then a new expression of wish form should be completed by the member. The wording quoted above keeps discretionary powers open, but acknowledges the potential parties concerned. It also removes the instruction from the spouse element where the spouse only has been named and decides they do not need it.

Using a Pilot Trust

Another commonly used option prior to Pension Freedoms was a Pilot Trust. Under the new death benefit rules, while payment of death benefits into a trust where death occurred under the age of 75 is tax free, the assets become trust assets and as such will be in a taxable environment. Death from age 75 would mean a tax charge of 45% on the benefits before they are paid into the trust, but with an attaching tax credit if the pension benefits are paid out to a beneficiary. From a tax efficiency viewpoint, a by-pass trust does not look the most attractive option.

For those members who value control over tax efficiency, then the use of a pilot trust in conjunction with an expression of wish might be an option to consider, especially under the age of 75. This can be a way of ensuring the member’s wishes regarding future beneficiaries can be met and this can of course be changed at a later date. It can also be a useful tool to protect assets in case of things like future divorce or bankruptcy etc.

Pension Freedoms undoubtedly gave us greater flexibility around pensions however it also added a layer of complexity where having the right approach can add significant value for many clients.

The information contained in this page is for professional Financial Adviser use only. If you are a private investor, please visit the Private Investor section or contact your Financial Adviser for more information.

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