Do you consider your pension an asset in the same way you think about property and investments?
Many people view pensions differently from these types of assets, but the truth is that your pension is another valuable asset, sometimes worth even more than the family home.
That's why planning for what happens to your money when you die should include planning for what happens to your pensions.
Let's look at some important points to consider when passing your pension on to your loved ones.
1. Understand the Death Benefits Your Pension Provides
Pension rules and regulations can be very complex. When considering what you want to happen with your pension after you die, you need to know what type of pension you have and its specific rules regarding death benefits.
Some pensions have automatic rules for what happens when you die, such as providing an income only to a dependent, like your spouse.
Other pensions offer more flexibility regarding who can inherit your pension and how they can access it.
To figure this out, you'll need to speak to the Pension Scheme Administrator, or find an Independent Financial Adviser that you trust - they'll be able to help (more on that below).
Note that any new state pension entitlement that you have built up cannot be passed on in the same way as a private scheme. If you're unclear on how the state pension works, take a look at this article here.
2. Complete a Nomination of Beneficiary Form
For pensions that allow you to choose who inherits your money, you can complete a "Nomination of Beneficiary" form - sometimes referred to as an expression of wish.
This form informs your pension scheme of your intended beneficiaries. In some rare cases, the scheme may decide to pay benefits to people not nominated if they believe it is the best course of action (as an expression of wish is a non-binding agreement, so there is some flexibility).
If your loved ones are not listed on the form, they might not be able to keep the money in a pension or drawdown arrangement which offers tax advantages. Instead, they may receive a lump sum directly into their bank account.
Understanding what your pension scheme offers can help guide how you complete the Nomination of Beneficiary form. Alternatively, you might want to consider a different pension scheme that provides the options you desire for your loved ones.
3. Be Aware of Potential Tax Implications
Depending on your circumstances, your pension may be subject to lump sum death benefits allowance charges based on the total value of all your pensions.
There may also be income tax considerations for your beneficiaries, depending on your age at the time of your death and when the money is paid out.
While pensions are generally free from inheritance tax, there can be exceptions where it might apply.
Also be aware of the two-year-rule: Death benefits need to be paid within 2 years of the date of death, otherwise they might not be taxed as you might expect.
A financial adviser can help you with any pension tax issues that might affect you.
How We Can Help
The good news is that with our assistance, you'll be able to understand the rules of your particular pension and explore actions you can take to minimise any negative impacts on your family.
Your pension is likely one of your most valuable assets and can provide much-needed income for your loved ones once you're gone.
If you need to get in touch with a local pension expert, don't hesitate to reach out to us by clicking the link below:
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