Since Easter I’ve spent at least part of each week out and about at events, chatting to advisers and most recently attending the AMPS conference. It’s been great to see real people and have the level of interaction that just isn’t possible over video calls.
One thing that hasn’t changed since I was last out and about is that I always get questions on death benefits. This is both from advisers and chatting to industry peers from other providers.
Death benefits in pensions are very generous, but they are not straightforward. Yet they could be a lot simpler.
In the vast majority of cases death benefits paid from pensions will not be subject to Inheritance Tax. However, this is only the case if trustees have the ability to exercise discretion, and this is where things can get particularly tricky. Even in the majority of straightforward cases where the expression of wishes is up-to-date and uncontested, there are processes required to ensure this is the case. Providers cannot simply just follow the nomination form without making enquiries about other potential beneficiaries, checking for changes of circumstances and any other relevant factors. All of this takes time, incurs costs, and delays distribution. And let’s not forget the people we are dealing with here are recently bereaved, so by their very nature will be vulnerable, and may well have been reliant on income from the deceased.
A significant minority of cases are more problematic, and all too often the provider is put in the middle of family disputes in a no-win situation where somebody is always going to be unhappy whatever the final decision. Decisions are increasingly being contested and this is one of the biggest growth areas in complaints for the Pensions Ombudsman. Although the Ombudsman cannot tell providers how to distribute death benefits, trustees have to demonstrate that their decisions are reasonable, or they could be made to go back and reconsider.
My question is: would it not be far simpler to have a carve-out for pensions that means benefits can be paid free of IHT without the need for discretion? In that way clients could be certain their wishes would be followed, admin costs for paying out death benefits could be significantly reduced, and benefits could be paid out much quicker.
I am not suggesting rules change so there are no circumstances when IHT should be payable – the terminally ill should not be able to simply place all their money into their pension in their dying days to avoid IHT – and there will be set exceptions where a nomination should automatically be disregarded – for example a nomination to someone whose relationship is described as “spouse” whom the deceased long since divorced may not be appropriate either. But a binding nomination alone should not be cause for pension benefits to automatically be included in the deceased’s estate.
Changing the rules could make the process less stressful for all concerned with minimal loss to the Treasury. At the moment it feels like we’re all dancing through hoops to get to the same end point, with little gain for anyone involved.
It would be great if, in a few years’ time, when meeting up with advisers and peers we’re not still discussing this same old issue.
This article was previously published by FT Adviser.
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