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Where there’s a Will, there’s not always a way to pass on your pension

Unlike me, you probably don’t spend the majority of your time advising people on their financial affairs relating to inheritance tax and estate planning.

If you did, you’d know about STEP, a global organisation for those in my line of work. Last month, its journal reported a significant rise in people wanting to renew or amend their existing Wills, with some law firms saying they had experienced a 75 per cent jump in demand.

Maybe we shouldn’t be surprised that people are, possibly planning for the worst in the current pandemic.

Pensions hold nearly half UK’s wealth

But even I was surprised by another figure: 42 per cent of the UK’s total wealth is held in private pensions.

So I thought it was timely to explore how this affects inheritance and estate planning.

When a personal pension plan holder dies, the remaining pension balance can be passed to nominated beneficiaries outside an individual’s estate, thereby avoiding inheritance tax.

What’s important to remember is that where this money goes is not dictated by instructions in a Will, which only deals with what’s in someone’s estate, not what lies outside it.

So it becomes a decision for the pension scheme's trustees but in almost every case where a “nomination of wish” form has been completed by the holder, they will follow his or her instruction.

If you have a personal pension, ask yourself:

  • Have you nominated beneficiaries?
  • If you have, is it your spouse? Is that the most appropriate person? 
  • Would it make more sense to nominate your children, or even grandchildren, if your overall estate and that of your spouse is sufficient to provide all ongoing financial needs without recourse to the deceased’s pension fund?

If you are in any doubt, or you do not instantly recall who the beneficiaries are, your financial advisor should be able to help.

What’s your pension type?

There are many different types of pension but a significant minority do not enable what’s left to pass outside the estate.

If you have an executive pension, a Section 32 plan, an individual pension arrangement but written under occupational pension rules, or an older style retirement annuity plan, the position is different.

Many people have substantial benefits tied up in older style pensions, which need to be reviewed in order to ensure that as much value as possible can be passed down the generations in the most tax-efficient way.

There are other important considerations that need to be taken into account when reviewing an individual’s pension funds - too numerous to put in a blog.

I would say that, in many cases, attending to your pension planning, particularly where there is a reasonable expectation of leaving a substantial balance on death, is every bit as important as ensuring your Will fully reflects your current wishes.

Tax efficient fund transfer

Amending a pension to ensure the optimum financial outcome for both the pensioner during their lifetime and for the tax efficient transfer of funds on death, requires professional advice as there are many pitfalls.

For example, your pension may not offer the same flexibility on death but may have inherent, invaluable features, such as guaranteed annuity rates, (GAR’s) and guaranteed rates of investment growth that would make a transfer to a personal pension unsuitable.

On the other hand, it may make perfect sense to consolidate a number of different pensions into one, more manageable, self-invested personal pension plan, (SIPP), that will offer the same flexibility and IHT friendly outcomes.

The most important point I can make here is that if you are in any doubt about how your pension plan or plans are structured, whether or not they are being managed effectively and proactively and whether or not there are better options, you need to seek quality professional advice.

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42% of the UK’s total wealth is held in private pensions. How does this affect inheritance and estate planning?

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After 40 years of experience in the pensions world, I'm sharing my insights.