Do you have a pension old or new, or perhaps one that you are drawing down on?
The rules changed in 2015 to assist with who can benefit in the event of your demise before you access the pension(s), or before the funds are used up. This, however, does not mean your pension(s) include the flexibility the new legislation was designed to bring in.
The important bit
For your plan(s) to take advantage of the new legislation they needed to be adopted by the pension provider and many haven’t.
To ensure the benefits go to whom you intended, some pension plan owners will have set up a spousal bypass trust; others will assume everything goes to their partner. Both these options could be wrong now.
The bigger concern is that hardly any of the pensions we review, and we review a lot, has anyone actually been named as a beneficiary.
Where do the rules apply?
There are many types of pensions, of which the most known are personal pension; stakeholder; contracted out; buyout plans; S32 bonds; retirement annuity contracts; executive pensions; defined benefit and both AVC’s (additional voluntary contribution) and FSAVC’s (free-standing additional voluntary contribution), and they all have different rules.
Most people don’t realise that pension schemes can usually decide who receives the benefits, even if you have done a nomination form to declare a named beneficiary. Tax and control are also key to the benefits left on death. They can remain tax free or become liable to basic and even high rates of tax. Other charges can also become payable, and if you have set up a spousal bypass trust, how sure are you that your chosen trustee actually understands trust law?
It’s time to check!
Newer pensions, especially those on managed “wraps”, should have adopted the new flexible legislation regarding benefits, but some guidance from the pension holder whilst alive is still appropriate but not always done, or done in full. This means some beneficiaries could still be those you would not otherwise choose. It is therefore important this is addressed as soon as possible.
This, however, does not mean your pension(s) includes the flexibility the new legislation was designed to bring in. For your plan(s) to take advantage of the new legislation they needed to be adopted by the pension provider and many haven’t.
It is important that older plans are reviewed and, at the same time, checked for VFM (value for money). The costs can be low on old group schemes but fund choice can be limiting or an inappropriate default fund used.
Many pensions still use life-styling which is designed to reduce investment risk in the last five to ten years before retirement. If you are not buying an annuity but plan to drawdown on your fund, why would you want life-styling? A pension review will sort this.
Another consideration that can exist, even for those with the forethought to nominate a beneficiary, is that if you or they are elderly, it may be more appropriate to include someone younger, even if this is done at time of death, it’s usually not too late. You could, for example, nominate a minor if the scheme allows and this can be very tax advantageous.
Pension funds have the ability of not being included in an estate on death. This means the proceeds can be paid quicker and more tax efficiently, and reduce the estate value for inheritance tax purposes.
Will instructions regarding pensions is not a good idea as they are normally ignored. To make Will instructions mandatory on the pension would be the worst thing to do tax wise, which is why they are not binding.
Something else to consider when looking at pension death benefits, is that some schemes only return the employee contributions rather than full benefits which can be considerably more.
Pensions should be looked at as a simple tax efficient savings plan, and they are, if you use an appropriately qualified and experienced advisor.
In summary, if unsure, have your pensions reviewed by an advisor with advance pension exams.
Now is a perfect time to analyse your finances. Contact me today for a complimentary telephone or video call.