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There’s a lot of planning and paperwork that needs to be done to ensure your money is distributed as you wish when you die.
But have you stopped to think about what will happen to your pensions? If you’ve got a defined contribution pension, like a personal pension or SIPP, you’ll be able to leave any remaining funds to your loved ones when you die.
Or, if you’ve got a defined benefit pension, they may be entitled to ongoing income or a lump sum. However, whatever the arrangement you have, it’s important to give your pension providers instructions, telling them who you would like to get the money. You might hear this referred to as ‘nominating pension beneficiaries’.
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Defined contribution pensions are the most common type of private pension today, where you get a pot of cash for retirement that’s based on the total value of your contributions and the performance of your investment.
When you reach the minimum age (currently 55 but rising to 57 in 2028), you can start taking money out of your pension, but your income won’t be guaranteed.
Any money remaining in your pot when you die, can be passed on to whoever you like (whether you have started taking money out or not). You can leave it to just one person – such as a partner or spouse – or share it between multiple people.
Your pension provider will have asked you to nominate beneficiaries by completing an expression of wishes form when you took out the plan, but if you skipped this step, it’s not too late. You can usually update this information by logging into your pension online.
Or you can contact your pension provider. Lucie Spencer, financial planning partner at Evelyn Partners, warns that if you don’t leave any instructions, your pension trustees make the decision on your behalf. They would do some research to decide who should get the money, but this wouldn’t take into account your personal wishes.
“They will make the decision on whom receives the funds and what percentage with no input from you. Therefore your funds may go to someone who you do not wish to benefit, or they may get a greater share than you wish to leave them.
“It could be your child is going through a divorce and therefore you did not wish to leave them as much of your pension. But as you didn’t have a nomination of beneficiary they could receive far more than you intended, and this ends up being split with their estranged spouse, which was not what you wanted,” she explains.
When you’re naming beneficiaries, there are a few things to consider, as Craig Rickman, personal finance editor at Interactive Investor, points out: “While not essential, it can also be helpful to provide alternative beneficiaries, such as your children or grandchildren, should your spouse pass before you and you forget to inform your pension provider.
“If you’re naming multiple beneficiaries, make sure you define how you would like the money split, especially if you want something other than equal percentages.”
You should also let your provider know if your circumstances change, he adds.
“An obvious scenario is if you get divorced or separate from a long-term relationship. Whether or not the parting was amicable, you're unlikely to be enamoured with a former spouse or partner pocketing your pension savings upon your death. The prospect is probably unthinkable, especially if you leave behind loves ones who are financially dependent on you.”
For most defined contribution pensions, your instructions aren’t legally binding. This is because pensions trustees have the discretion to decide where the money goes.
It’s this flexibility that means pensions fall outside of your estate and are not, currently, subject to inheritance tax (although this is set to change, with pensions becoming subject to IHT from April 2027).
That said, in the vast majority of cases, pensions trustees will follow your instructions and only over-ride them with good reason. Spencer explains: “The trustees will ensure that they review the family situation before deciding on who to benefit.
If an individual has deliberately cut out someone from their expression of wishes who is dependent on them, the trustees can allocate funds to them.
“For example, a previous client of mine had a disabled child that his family was unaware of. He paid maintenance for this child all the child’s life, but didn’t leave him any of his pension. The trustees discovered this child and therefore allocated funds to him as he was clearly dependent on the individual who passed away.”
Another scenario where your wishes might be over-ruled was if you had got divorced or married and hadn’t updated your nomination.
Rickman adds: “This illustrates why keeping your nominated beneficiaries up to date is so important. It provides clarity to the trustees about what you would like to happen, giving you greater control over the outcome, while also enabling the money to be distributed quicker, avoiding the inconvenience, hassle, and possible cost of any delays.”
There may be a small number of pensions where your nominations are binding. This is when the arrangement is written under ‘direction’ rather than ‘discretion’. Clare Moffat, pensions and tax expert at Royal London, explains: “Whoever is named in the beneficiary form will receive the money. This could mean that an ex-husband or wife would receive the money. It could also mean that inheritance tax would be due on the money.”
She adds: “In this situation, it’s even more important to keep beneficiary forms up-to-date to make sure that the right people receive the money on your death, as the pension company would not be able to take your personal circumstances into account.”
If you’ve got a defined benefit pension, like a final salary or career average scheme, you’ll get a guaranteed income for life based on your earnings and the length of time you were in the scheme.
That means you won’t have a straightforward pot of cash to pass on to your loved ones as you would with a defined contribution pension.
But certain people in your life may still be entitled to money when you die. If you have already started taking your pension when you die, a pension will normally carry on being paid to your dependants.
Clare Moffat explains: “If you die after you’ve started to receive a defined benefit pension, a surviving spouse, partner, children under 23 (or older if disabled), will normally receive a percentage of your pension.”
This will normally be paid until they die, or in the case of a child until age 23 (longer if they have a permanent condition that means they can’t earn a living).
The child allowance can normally cover any dependent child (like a grandchild or niece or nephew) if they were financially dependent on you.
You don’t have to fill in a nomination form to say who you want to receive your dependant’s pension, but it’s considered good practice to do so, especially if you’re nominating someone you are not married to.
Or, if you die before your pension starts being paid, a lump sum may be payable. This could include a death in service payment, if you are still with the employer. This is often a multiple of your salary, such as two or four times your salary.
A death in service payment can be paid to whoever you wish, so for this it’s important you complete a nomination of beneficiary or expression of wishes form and keep it up-to-date if your circumstances change. If you don’t, problems could arise after you have died.
Moffat adds: “Different rules apply for different pension schemes. If the nomination of beneficiary form is out of date, or there is no form, the pension scheme might use their discretion to investigate and pay who you would want to receive the money. But in some cases, they might just pay whoever is named on the form. That’s why it’s important to keep expression of wish forms up to date so that the money is paid out in line with your wishes.”
If you don’t nominate anyone and you don’t have a spouse or child, the death in service benefit will usually be paid into your estate.
Spencer suggests updating nomination documents every time you go through a major life change. “If you do get divorced for example, then your ex-spouse may no longer be dependent on you, and on the flip side, if you get married you need to update your nomination with the information for your new spouse.”
“It could be that there is no one dependent on you, but if you are working and could potentially have a lump sum pay out when you pass away, this can be paid to a wider range of beneficiaries. So it is important that this information is kept up to date.”
If you’re not married to your partner, you need to be particularly careful and check the rules of your scheme. Public sector pension schemes will generally pay a dependant’s pension to an unmarried partner as long as they were financially dependent, or interdependent, on the pension scheme member.
This is based on the pension tax rules in the 2004 Finance Act. A scheme can define its own criteria for interdependency (also known as mutual dependence). Moffat explains: “You might also assume that cohabitees have equivalent rights to married individuals due to changes in law. However, for those with public sector pensions, the right to a pension for cohabitees was only introduced in the mid-2000s and is only applied from that date.”
She adds: “In addition, cohabiting relationships must be able to demonstrate they are genuinely committed. You could get married the month before death and that proves a committed relationship, but cohabiting for less than two years doesn’t give the same entitlement.”
Pension schemes will typically ask for evidence after the member dies, such as joint mortgage payments, or other evidence that you have been running a joint household.
Some schemes used to refuse to pay out unless the unmarried partner had been nominated by the scheme member, but a legal challenge in 2017 established that this should not be a requirement.
Still, there’s certainly no harm in doing the nomination and it could help things go more smoothly after your death. If you’re in a long-term unmarried relationship but not cohabiting, you may have difficulty claiming a dependant’s pension.
The NHS pension scheme, for example, states that both people must have been “living together in an exclusive relationship as if they were husband and wife or civil partners” and in addition, “the member and partner are financially interdependent or the partner is financially dependent on the member”.
It says that both of these need to have applied for at least two years. With a private sector defined benefit pension, whether or not cohabitees can receive benefits is down to the discretion of the trustees.
Contact your pension provider to find out how to nominate beneficiaries – you may be able to do it online by logging onto your account.
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