The death of a loved one is an emotionally challenging time for everyone involved and the last thing anyone wants is to be faced with financial challenges and issues. Combatting such issues is easily solved by forward planning.
“There are only two things certain in life: death and taxes”
This quote by Benjamin Franklin embodies the conversational topics financial advisers come across on a day to day basis. Generally, most people prefer to live in the present and not discuss subjects such as planning for the event of death. This is entirely their prerogative but undertaking good strategic financial planning can ensure that loved ones are looked after when you are no longer here. It is every good financial planner’s duty to discuss these difficult topics and make sure that a client’s finances are best positioned for when the inevitable happens.
Planning for the future involves numerous facets, including proactively addressing issues which arise from legislative changes – specifically when considering pensions as legislation change occurs all too often. July 2015 saw a large reform in pension freedoms and the flexibility of death benefit payments.
For members who die before age 75, funds within a pension will be paid out free from income tax and if the member dies after aged 75, the funds are taxed at the beneficiary’s marginal income tax rates. The recent changes to pensions in the UK have seen the restrictions on who can receive death benefits in the form of income lifted. Pre-July 2015, only dependants could receive death benefits in the form of income and lump sums could be paid to pretty much anybody. Since the new legislation, lump sum payments have not really changed, however, income payments can now be made to three types of beneficiary:
– Dependants
– Nominees
– Successors
There are additional caveats to this definition, but Dependants are simply defined as a spouse/ civil partner or a child of the member who is under the age of 23. Nominees are beneficiaries who are named by the client to receive death benefits – usually in the Nomination Form or Expression of Wish(es) Letter. A Successor is a beneficiary who has been nominated by either a dependant or nominee to be in receipt of the benefits.
More legislative change – How does it affect you?
You may think “Great, I can now nominate who benefits from my pension but so what?”.
Throughout the course of our lives, personal circumstances are forever changing. This could be the birth of a child; a grandchild; a marriage; re-marriage; divorce; death- all these situations uproot the norm of our daily lives and can have huge implications on things such as death benefits. The introduction of further freedom to choose who will benefit from your death benefits makes it integral to ensure that the correct people are nominated and that the nomination instructions are revisited on a regular basis.
For further emphasis, imagine the following scenario. A married couple nominated each other as 100% beneficiaries for their respective pension schemes. Somewhere along the line they decide to get divorced – a perfectly common scenario for a growing number of individuals in the UK. Unfortunately, one of the two dies having not reviewed their pension death benefit nominations and subsequently the death benefits are paid to the ex-spouse in the form of a lump sum or pension income. The deceased member may have had other plans for this money (I.e. passed to a new partner) however, as the most recent nomination form named the ex-spouse as the sole beneficiary, the scheme administrator will more than likely proceed on this basis.
Now, some may argue that a Nomination Form or Expression of Wish(es) Letter is not a legally binding contract and the scheme administrator does hold some form of discretion when making death benefit payments. This may be true but why leave a decision like this up to the judgement of strangers? Making sure that your death benefits nominations are up to date will grant you piece of mind with the knowledge that the money held within your pension will end up in the hands of the correct people.
How Do I Update or Review My Nomination Forms?
Updating your pension nominations is an uncomplicated process which usually involves either completing a signed letter or specified death benefits form- depending on your pension provider. Proportioning death benefits is either done by naming beneficiaries and assigning a percentage of the benefits (I.e. Mr John Smith – 100% of benefits) or nominating unnamed beneficiaries and percentages leaving it up to the discretion of the scheme administrators (I.e. 50% split equally amongst my current grandchildren and any subsequent grandchildren that may arrive). Please be aware that the latter is uncommon, so it is important to know how your scheme provider wants the nomination formatted before you submit it.
If you wish to know who your nominees are or would like to update your nominations, get in touch with your financial adviser and they will be more than happy to assist with this.
To summarise there are three main points you can take away from this:
- Know who your nominees are.
- Regularly readdress the suitability of your nomination form.
- Speak to your financial adviser.
For more information on this or any other related topics please contact Joe McGovern on j.mcgovern@www.mpafm.co.uk
https://www.linkedin.com/in/joemcgovern96982b11/
