The importance of updating death benefit nominations

Since pension freedoms came along in 2015, pension death benefits have been exceedingly generous – too generous if you share the views of the Institute for Fiscal Studies’ December report.

In the vast majority of cases funds remaining on death are passed on without liability to Inheritance Tax, and if the deceased was under 75 free of Income Tax too. Even for older deaths, beneficiaries can benefit from keeping funds in the tax-free pension environment and just take income as and when needed to minimise Income Tax due.

In many cases the pension fund can still be sizeable on death and given the current incentive to spend it last when deciding what order to take income, it will often be the next biggest asset after the house. Yet when the time comes, in too many cases we find expression of wishes on file that haven’t been updated for years.

Having out-of-date information, or none at all, complicates matters and lengthens the whole process of scheme administrators deciding who to pay out benefits to. For those who were truly dependent on the deceased, it can also cause financial hardship whilst things are sorted (although in some circumstances it may be possible to make interim payments once basic details are received). Even if this isn’t the case, nobody wants the additional stress and anxiety on top of their bereavement and having to sort out the rest of the deceased’s affairs. And to top it all off, if the scheme administrator is having to do a lot more work to establish who the potential beneficiaries are they are well within their rights to charge for this time.

As an example, I recently reviewed a case where the deceased was separated, but not divorced, from his second spouse. The expression of wishes was over 15 years old and nominated his second spouse to receive half the fund with the other half split between his two (now adult) children from his first marriage. He also had two children from the second marriage who were very young at the time the expression of wishes was completed but by the time of his death were adults too.

After some digging it transpired there was a separation agreement which stated the second spouse had kept the house and the deceased got to keep his pension – the intention was that she would not receive anything from it either in his lifetime or on death. But no one had thought to tell us as the pension provider. It took a lot of digging to get this information, and in particular to get confirmation from the long-separated-from spouse, but as they were legally still a dependant of the deceased this was an important step. All of this meant delays, admin headaches for the executors, and additional costs, a lot of which could have easily been avoided if the expression of wishes had been updated and details of the agreement passed on in his lifetime.

This case was by no means unique. Many times we see that the pension has not been considered when circumstances change. It may be that the Will has been updated – and even sometimes may state what should be done with the pension – but the pension provider has not been informed.

Although scheme administrators and trustees may consider what is written in the Will, they are not in any way bound by it. Of course it is also true they are not bound by expression of wishes either – if they were then this would be a ‘direction’ and the pension would fall within the estate and be potentially liable to Inheritance Tax. However, having up-to-date information can make a huge difference to how straightforward the process is when dealing with the deceased’s pension. And let us not forget that by definition the likely beneficiaries – the close relatives of the deceased – will be vulnerable at this time.

In complex cases not having an up-to-date expression of wish can come at an additional cost. If getting the information required to make a decision drags on for more than two years since the scheme administrator knew of the death of the member and the member died before the age of 75, then instead of being tax-free, any benefits when they are eventually passed on will be subject to Income Tax.

So the message is to make sure expression of wishes are up to date. When you have annual reviews with clients don’t assume nothing has changed, check there isn’t something your client hasn’t mentioned – and even if it’s all still up-to-date make a note that you’ve confirmed that is the case.

When the time comes it could make a big difference to those left behind.