We’ve previously talked about how the contrasting financial fortunes of baby boomers, generation rent and boomerang children are prompting many people to reconsider who they pass money to within their family. With payment of benefits no longer limited to dependants, clients can choose to pass this money to family members whom they feel need it most. And, it doesn’t even have to be a family member – anyone who is nominated as a beneficiary by the client can potentially receive the pension benefits.
However, without the benefit of a crystal ball, it can be difficult for clients to plan for how their family circumstances might change over time and how this may impact who they want to receive the benefits.
When it comes to updating an EoW, this often results in a real temptation to try and cover all possible scenarios. But, it’s important to remember that the scheme administrator has to have discretion as to who they pay benefits out to. And, if the wording of an EoW form is too prescriptive or detailed, unfortunately it could be interpreted that there is no discretion involved.
This can in turn cause problems with inheritance tax if HMRC sees the designation as irrevocable. For example, a nominated spouse/partner may decide they don’t want the benefits and asks for them to be passed to their children. However, the surviving spouse/partner doesn’t have discretion over this – that’s in the hands of the trustee. And HMRC could argue that an unauthorised payment has been created because the spouse has technically surrendered their rights.
The key to avoiding this type of situation is to include enough flexibility in the wording of the EoW. Here at Ascentric, we have our own committee dedicated to looking at claims and, from their experience, best practice is to name potential beneficiaries and with suggested proportion allocations.
It’s also worth remembering that rather than using a pre-printed EoW form from a product provider, the member can produce their own, although again care should be taken when it comes the wording of the self-produced form. To help, we’ve included an example of suitable wording here, which should hopefully cover situations where the spouse would rather their children receive the funds:
"In the event of my death I would like the scheme trustees to consider the following potential beneficiaries. I understand that this nomination is not binding on the scheme trustees and that they will consult with the relevant parties, which may include close relatives, personal representatives / executors and my financial adviser in the course of exercising their discretionary powers."
This wording also allows for a situation where the spouse dies before the member, by keeping discretionary powers open while acknowledging the potential people concerned. However, ideally, a new EoW form should be completed by the member if a spouse should die before them.