Death Benefit Options

Many clients will have read that on death their pension can be passed on within the tax wrapper, retaining the tax advantages.

However, a large number of pension contracts will not offer beneficiaries’ flexi-access drawdown, typically those managed through legacy administration systems. This can be the case even where the arrangement can facilitate full flexibility for the named scheme member during their lifetime.

Similarly, where expression of wish documentation is not kept up to date, pension benefits will often pass to a spouse or civil partner, creating the potential for unnecessary IHT liability.

In an ideal world, these issues could be ironed-out after death, with the agreement of all family members. But therein lies the catch – pension arrangements cannot be posthumously undone.

This is primarily down to two factors. Firstly, trustees are not permitted to use discretion to offer beneficiary flexi-access drawdown to someone who is not a spouse or civil partner of the member. If the member wanted to make sure it was available to their wider family they would have to make a nomination to that effect during their lifetime. This is a requirement of the new pension freedoms legislation.

Secondly, under section 169 of the Finance Act 2004, in order to meet the ‘recognised transfer’ requirements, pension assets must be designated to beneficiaries’ own account before a transfer can be made to an alternative provider.

As a result, the member must elect for an income option (flexi-access drawdown, annuity or lump sum) within the existing scheme. Where flexi-access is not available, they are therefore compelled to take an alternative, sub-optimal option.

The good news is that there is an opportunity for planners to guide clients through this complexity.

Help clients review expression of wish forms to ensure the plan reflects the most efficient strategy for passing on assets to family.

Finally, ensure clients are aware of the death benefit option made available by the incumbent pension scheme and consider an alternative wrapper/provider if the current arrangement does not offer the required flexibility.

Jon Greer, pensions expert, Old Mutual Wealth