There were significant changes to pension rules last year which extended the importance of having a financial plan that properly considers not just you but also the successors and beneficiaries to your Estate. Having the appropriate particulars in place for your pension could now be as important as your Will going forward.
Even the longstanding practice of writing a Will is being left too late by a significant amount of people. Almost £1 billion will be left abandoned in bank accounts this year alone by people who have died without a Will, according to research from a solicitor firm.
According to intestacy rules which dictate the distribution of assets when someone dies without a Will, banks must freeze their accounts until a beneficiary is decided. However, they are allowed to release cash if the balance falls below a certain threshold – which is determined at the banks’ discretion, according to this research.
It is often assumed that the entirety of someone’s estate automatically goes to their spouse or civil partner when they die. This is not the case, and if you die without a valid Will, then the Government determines who inherits your assets according to a strict formula.
For many, their pension fund will be their biggest and potentially their most liquid asset but a Will cannot determine who will inherit it and instead an appropriately filled out ‘expression of wish’ form is necessary for this. Having the right documentation in place could mean the difference between no tax or losing more than half the pension fund to the taxman.
Before the pension rules came into effect in April, one financial planning option was to set up a trust to receive death benefits and avoid them ending up in the spouse’s estate. This was especially key when considering inheritance tax planning on the subsequent death of the surviving spouse.
While this was sound financial planning at the time, the new pension flexibilities mean this is no longer likely to be the best option, and instead nominating a beneficiary or beneficiaries to inherit your pension is worth exploring as a way to pass on your wealth. The ‘expression of wish’ form, although not legally binding, will notify the pension scheme trustees of what you would like to happen.
However, the pension scheme needs to be of the right structure not only to get the most out of the potential death benefits but perhaps more importantly, to get the most out of the new pension freedoms which can allow you, and any nominated beneficiaries, to keep the pension invested drawing funds as and when they are needed, and in the most tax-efficient manner.
Some older personal pensions will not provide access in this way, so a transfer to an arrangement that does could be necessary. Such a transfer cannot be done after death, which is why it is important to consider consulting an Independent Financial Adviser at an early stage to ensure all of the new, extremely valuable pension freedoms and benefits are not missed.
Utilising the right pension arrangement and having all the necessary documentation in place could be as important as having a valid Will to ensure the distribution of your wealth is according to your own wishes and as tax efficient as possible. Such plans are better put in place as early as possible to avoid the risk of being too late.