Pension pots make up about 40% of UK household wealth. However, clients tend to give much less attention to what happens to their pensions following death than they do to their other assets. They tend to focus on their wills. The succession to pensions is not usually controlled by an individual's will. In this series of articles, we look at the ways in which a pension can be passed down following death so that loved ones can receive any remaining pension savings ("death benefits") in the most appropriate way.
Types of pensions
The main types of pensions are state pensions, workplace pensions and personal pensions. Our focus in this and subsequent articles will be on personal pensions and, in particular, self-invested personal pensions (SIPPs).
Self-invested personal pensions
SIPPs offer flexibility and are popular among the self-employed and business owners. They are also often used by employees who, at retirement, may wish to transfer their workplace pension(s) into a more bespoke arrangement to suit their retirement planning requirements. SIPPs are usually set up as discretionary trusts, which means that the death benefits are paid out at the discretion of the pension scheme trust’s administrator and should not suffer inheritance tax. Although the investments within the pension are held by the trustees, the member can nominate beneficiaries they would like to receive the death benefits. The ultimate decision as to the recipient(s) of death benefits rests with the pension scheme trustee or their appointed administrator.
Lump sum and drawdown death benefits
A beneficiary will usually have the option of inheriting either a lump sum cash payment or a pension fund which can provide an income, commonly referred to as a “beneficiary drawdown fund”. A third option which, historically, has not been particularly popular, and therefore will not be considered in this series of articles, is a beneficiary annuity (i.e., a guaranteed income for life, typically provided by a pension or insurance company).
Expression of wish forms, bypass trusts and tax
The pension scheme rules specify those who can receive death benefits. This will include family, other individuals, trusts and charities. It is important that the member nominates the beneficiaries who they wish to receive death benefits. The nomination is usually done in an "expression of wish" form. This will be considered further in the next article in this series.
The pensions legislation of 2015 allowed pensions to be more easily passed down generations. It is possible for children to inherit pensions. In some cases this will be done where a surviving spouse or partner does not need further funds, having sufficient wealth of their own. In other cases, it may be appropriate to leave death benefits (lump sum payments) to a trust. We will discuss this in more detail in the third article in this series.
The decisions around the succession of death benefits are often influenced by the tax consequences. Among other things, this will depend on the age of the pension scheme member, type of death benefit, the timings of payments and the circumstances of the recipient. We look at this in more detail in the fourth and final article in this series.
Summary
This series of articles highlights the importance of reviewing pension death benefits. We recommend clients to take independent financial advice about their pensions, including pension death benefits. The second article in this series looks at expression of wish forms and the third article discusses bypass trusts.
For further information on any of the legal issues raised in this series, please get in touch.
Contributor
Partner
