According to the ONS (Office for National Statistics) data released this year, private pensions are now the largest component of total wealth at 42% with almost £1trn more held in pensions than in property. The statistics showed that, in 2018-2020, occupational and private pension wealth was estimated at £6.45trn, whilst property wealth in the UK was estimated at £5.46trn.
This month our new planning team member, Antonia Roberts, takes a look at pension nominations, why they’re important and how to go about nominating. We’ll be providing a formal introduction to Antonia soon…
Since the 2015 Pension Freedom reforms, the way in which people use their pension has changed dramatically. Many are no longer drawing from their pension as a primary source of income in retirement but are instead earmarking pension funds as a legacy for future generations.
A pension makes passing wealth to loved ones and future generations very tax-efficient, because most pension funds fall outside the estate of the plan-holder on death and do not suffer from inheritance tax liabilities.
Importance of your pension nomination form
Making nominations is important to ensure that your wishes to leave a legacy are clear. Without a nomination, the benefit options on death are significantly reduced.
It is also important to ensure that any nominations accurately reflect current wishes and any decision-making concerning pension death benefit choices are being co-ordinated with decisions taken about your Will.
It’s now possible for anyone to be nominated to inherit pension funds – not just dependants.
As an example, inherited self-invested personal pension (SIPP) schemes will allow pension wealth to pass to a non-married partner whilst remaining within the pension wrapper. The pension is then available to them as and when they need it, rather than it being paid as a lump sum.
And there’s no requirement for them to wait until they reach age 55 to access it.
When is the right time to nominate?
Pension nominations can be changed at any time, and therefore there is no such a thing as a ‘right time’. The correct nomination ensures that clients and their loved ones are covered in any circumstance – including the worst-case-scenarios, such as premature death.
Changes in personal circumstances, how much your spouse may need in retirement, or reaching age 75 may all prompt a re-think on how benefits are to be distributed.
Do you leave everything to your spouse/partner?
Previously, people would usually nominate the whole pension fund to their spouse or partner when they die, ensuring that they are provided for during the remainder of their retirement.
But there are several issues to consider before choosing this route, and it is important to consider each client’s circumstances as a straightforward nomination to the spouse may not be the answer, particularly in the case of a second marriage or where there are significant other assets and inheritance tax issues to contend with.
Can my pension afford to skip a generation?
Not every spouse will need the whole of an inherited pension fund. If a sustainable retirement income for the survivor can be achieved using just a portion of the deceased’s fund, then they may be comfortable leaving the balance to children or grandchildren on first death.
Another question to consider is the future destination of inherited funds. Most clients will trust their spouse to pass any unused funds on their death to their children. However, the situation becomes more complex where there are are children from a previous relationship or a spouse remarries.
Passing everything to the spouse means also giving them control over what happens to whatever is left when they die.
Control using bypass trust
In more complex family situations, control over who can benefit from a pension is essential. Clients may want to consider bypass trusts, from which the surviving spouse and future generations may benefit, but they cannot ultimately control what happens to the pension fund.
How do we help?
Our lifetime cash flow modelling tool (AIMS) can help you look forward and assess the impact of directing pension funds to the next generation or beyond so you can be confident you don’t undermine the financial security of your dependants.
Pensions and estate planning inevitably go hand in hand these days so as part of our ongoing review service we keep both under continual review and that involves a review of pension scheme nominations and the use of Trusts.
This integrated approach to planning is what our clients value as with the right open discussions and a good financial plan, any family scenario can be catered for.
For more information about how we can help you or if you have any concerns or queries do please contact us.
Source of data: www.ons.gov.uk
