Pension death benefits – the intergenerational opportunity

We’ve written a few articles recently exploring how the intergenerational wealth landscape is changing along with the traditional direction of money and assets passing down through families.

This latest article focuses in on the pension death benefit rules, which were extended in 2015 and, as a result, can act as a potential source of intergenerational income.

We take a technical look at the careful balance of information and detail advisers and clients must get right in order to avoid some of the regular problems which can impact if and how pension benefits are passed on.   

Recapping the changes

It used to be the case that defined contribution pension benefits could only be left to ‘dependants’ but rule changes introduced in 2015 allow these to be paid to anyone nominated as a beneficiary. It also gives the flexibility to pass benefits down as a lump sum or in the form of regular income.

So far, so good. However, in order to take advantage of these changes, advisers and clients need to make sure they have left adequate direction for trustees about who they want the benefits to be passed down to. Not providing this instruction is a bit like giving your money to a complete stranger and entrusting them to look after your family with it!

Fortunately, there are a number of simple steps and regular checkpoints that can be put in place to help with a smooth transfer of the benefits.

Make sure an “Expression of Wish” (EoW) is in place – and kept up to date

A common issue for scheme trustees when a scheme member dies is that no direction exists at all on how the pension benefits should be passed on. This instruction from the scheme member usually comes in the form of an ‘Expression of Wish’ (EoW). But, even if an EoW has been completed, it was often done back when the member first joined the pension plan and it hasn’t been updated since.

Even if the EoW has been updated recently, the instructions will often conflict with the terms of the scheme member’s will. And then there are additional challenges if the spouse or beneficiaries have a different view of things.

When it comes to tackling these issues, a good place to start is to follow the general rule of discussing pension death benefits as part of the normal client review process. This helps to make sure their wishes are relevant, clear, consistent and up to date.

EoW wording – balancing the detail

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.

A last word on communication

Making sure all parties are aware of the member’s wishes can avoid delays in payment. The process of paying benefits will come at an emotional and stressful time for those left behind, so communicating the member’s wishes to their loved ones at the point when any changes are made can also prevent misunderstandings which may lead to uncomfortable situations.

Transfer of intergenerational wealth is on the rise and if you’re interested in finding more about this trend, read our recent article looking at how advisers can use the opportunity to establish relationships with younger generations of clients.

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