With pensions often an afterthought when dealing with a deceased’s estate, Jennifer Russell of Wright Hassall explains why pension nomination plans should be in place before death.

Planning what happens to your pension before death

When clients are planning for the future, they and their advisors will usually give careful thought to how their wills should be drafted to look after their loved ones once they have died. However, often not as much consideration is given to their pension nomination, even though the amounts accumulated within a pension can be considerable.

Where a deceased person has a defined contribution, or money purchase pension (as opposed to a final salary scheme), the pension trustees will usually have flexibility to decide where the funds are paid. But to ensure that the pension member’s wishes are carried out, it is therefore essential to provide the pension trustees with an appropriate nomination and to also keep this under regular review.

Making a pension nomination before death

The first step to making a pension nomination should be to look at the pension scheme rules to check who can benefit on the member’s death and in what way. Next, the client will need to decide who he or she wishes to benefit and consider the proposed beneficiary’s individual circumstances to determine how the pension should be dealt with following their death.

There are various options for pension members when it comes to determining how their pension should be distributed to beneficiaries, with options including:

• converting some or all of the pot to an annuity to provide a beneficiary with a regular income for life
• payment of a lump sum to a beneficiary or to a trust
• flexi-access drawdown, where the beneficiary can draw on the fund as and when required

It may be possible to request that the pension trustees liaise with the surviving spouse or partner and/or the member’s advisors before distributing the pension. The survivor’s circumstances and wishes at the time can then be considered.

Regularly updating your pension nomination form

Regularly reviewing a nomination form is vital to the whole process, as illustrated by the case of an estate I administered of a divorced man whose pension nomination still named his ex-wife when he died. The pension trustees refused to depart from the nomination, and so his ex-wife received his pension which was clearly not what he would have wished. 

Pension companies will have their own standard nomination forms, and depending on the client’s circumstances, this may be enough. However, a bespoke nomination may be more appropriate. Regardless as to whether a pre-printed company form is used, or a nomination form is specifically drafted, care should be taken to ensure that a ‘nomination’ is fit for purpose.

Considering the tax implications

Tax is obviously an important consideration too. Generally speaking, when the pension member dies before the age of 75 any benefits paid to a beneficiary or to a trust within two years of the member’s death are free of tax.

However, after the age 75, an individual beneficiary will pay income tax at his or her marginal rate on the sums received, and there will be a 45 per cent tax charge if a payment is made to a trust.

Using a trust to distribute pension funds after death

Nevertheless, tax is not the only consideration. Sometimes family circumstances will mean that a trust is appropriate, despite the possibility of a large tax charge, as it offers greater flexibility, protection and control.

Sometimes clients worry that giving a beneficiary complete control over his or her share of the pension would not be appropriate, especially if the beneficiary is young, is vulnerable, has addiction problems or has an unstable family life. The trustees of a discretionary trust would have discretion over the distribution of the funds, and so they could consider the beneficiary’s individual circumstances when deciding how much they should receive from the trust and when they should receive it.

It is essential to consider the pension as part of estate planning as a whole. For example, it was suggested to clients of my firm who wanted a degree of control over how their children used their inherited pension funds (but did not want to leave the pension funds in a trust) that the trustees of their will trust could be asked to review how the beneficiaries used the pension funds, and if they had been reckless the trustees could restrict that beneficiary’s access to funds from the will trust.

In other families, it could be appropriate to leave a pension to a child who is settled and able to manage those funds well, whilst also using the protection of a will trust to hold other assets for the benefit of a vulnerable child.

About the author

Jennifer Russell is an associate solicitor in the wills, trusts and tax team at Wright Hassall LLP. She advises on estate planning, including the use of wills and trusts.

See also

What happens if executors don't follow a will?

What to do after someone dies: a checklist

Find out more

Your pension when you die (Gov)

Your benefits, tax and pension after the death of a spouse (Gov)

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