The Importance of Completing an “Expression of Wishes” For Your Pension
The tax treatment for UK pension death benefits changed from 6 April 2015, increasing your flexibility to pass on pension benefits.
Most “Defined Contribution” pension plans are already held a trust arrangement, so the value of your pension benefits on death will not usually be included within your estate on death for the purpose of assessing inheritance tax.
Therefore it will be important to instruct your pension trustees how your pension death benefits should be paid for any “Defined Contribution” pension plans (Personal Pensions, SIPP, etc).
This is most easily done by completing an “Expression of Wishes” (also sometimes referred to as a “Nomination of Beneficiaries”) form.
What is an “Expression of Wishes”?
Through the “Expression of Wishes”, you can specify exactly who should receive a share of the “unused” pension funds on death. Anyone can be nominated as a pension beneficiary, including a charity or trust arrangement, to receive a share of your pension fund.
Each separate pension arrangement will need to have its own “Expression of Wishes” completed.
What does an “Expression of Wishes” Not Cover?
Whilst equally important to ensure death benefits are dealt with effectively under your current or ex-employer’s schemes, the scheme rules will only usually restrict death benefits to a spouse/civil partner, or dependent children. You should contact your pension trustee for further details, and keep them updated with details of eligible beneficiaries.
As well, if pension funds are used for annuity purchase it will be important to include death benefits at outset (such as a dependent’s pension or guarantee period) as you cannot amend these later. You should seek financial advice before setting up an annuity arrangement.
Why is Completing an “Expression of Wishes” Important?
As your pension funds do not form part of your estate, the pension trustees will not be bound by any instructions left in your will.
Therefore without an “Expression of Wishes”, your pension trustees will have discretion to pay out the value of your pension to dependents, but this may not be in accordance with how you wanted your assets to be distributed.
Alternatively, the trustees may opt to pay the entire value of your pension fund into your estate - thereby giving rise to, or worsening, a potential inheritance tax liability.
What if I Change My Mind After Completing an “Expression of Wishes”?
A new Expression of Wishes can be completed at any time and will replace the existing instructions to pension trustees. This allows flexibility where a previously nominated beneficiary has died, or you wish to amend the instructions to include or exclude additional beneficiaries.
What Options do My Beneficiaries Have?
Nominated beneficiaries of your unused pension fund on death will usually be provided with three options by your pension trustees:
What are the Tax Implications for my Beneficiaries?
How a beneficiary’s withdrawals will be taxed, from their share of your unused pension fund on death, depends on the age at which you die:
On death before age 75, any withdrawals by your beneficiaries are tax-free.
On death after age 75 any beneficiary’s withdrawals will be taxed as income. However, a non-taxpayer could be eligible to withdraw benefits tax-free, up to the personal allowance each year (£11,500 for 2017/18).
Who Should I Consider as a Beneficiary?
Most people nominated their spouse as the main beneficiary under an “Expression of Wishes”, and only consider changing this on death, separation or divorce.
However, where the spouse already stands to inherit substantial non-pension assets it may make more sense to redirect pension death benefits to other beneficiaries.
For example, children (or grandchildren) can be nominated to receive a share of the “unused” pension fund on death. This can have a particular advantage as the beneficiaries are immediately able to access these pension benefits (rather than waiting to age 55 which is the usual earliest age for accessing pension benefits, other than for reasons of ill-health).
What Happens to The Beneficiary’s Share of My Pension Fund When They Die?
Once the “unused” pension fund passes to your beneficiaries, they would normally complete their own “Expression of Wishes”.
Moreover the tax treatment passing to their own beneficiaries will be “reset”, based on their own age at date of death as noted above.
As such, there is the potential that your pension wealth can now be passed on tax-efficiently through two or more generations until the funds are fully spent/withdrawn.
Save & Invest considers an “Expression of Wishes” form to constitute an important part of your estate planning arrangements, alongside valid wills and Powers of Attorney.
This factsheet has been prepared on the basis of our current understanding of HMRC rules and regulations which are subject to change without notice. This factsheet should not be construed as to the suitability of any proposed course of action, and you should seek independent financial advice regarding your own arrangements. If you wish to discuss this further, please contact your usual Save & Invest financial adviser.