Why it pays to be clear

FIVE-MINUTE GUIDE TO... NAMING PENSION BENEFICIARIES

PEOPLE have so much admin in their lives it can be easy to overlook crucial pieces of paperwork, such as nominating your pension scheme beneficiaries.

This is especially important during the pandemic, because if you die suddenly without doing this you can bequeath large tax bills and even more admin.

Your pension scheme will also have to identify your beneficiaries and that could delay releasing funds at what will already be a difficult time for your family, insurer LV= has warned.

Company and personal pension funds do not normally form part of your estate and are not covered by your will.

You therefore need to nominate beneficiaries, known as an “expression of wishes”, and update them following major events such as divorce, remarriage or new children.

Although you should have done this when joining the scheme, in many cases people never get round to it or their circumstances change.

Your wishes are not fully binding on your pension scheme, which has the ultimate say over who receives the benefits, but it must take them into account.

You can make a binding nomination on some schemes but the money will then be included in your estate and could be liable to inheritance tax.

David Stevens, savings and retirement director at LV=, said if you make a nomination and keep it up to date, any death claim should be settled quickly: “It should also prevent disputes and ensure benefits are passed to the intended people.”

Make sure your instructions are clear, otherwise it can trigger disputes. Stevens added: “A simple example might state, ‘Please consider my wife/husband in the first instance, but if she/he has predeceased me or does not want to be considered, please consider paying my children in equal shares instead’.”

One danger of failing to set out your wishes is that next of kin could be forced to take all the pension as a lump sum, triggering a large tax bill.

Stevens said: “If someone leaves a £300,000 pension to a higher-rate taxpayer, the beneficiary could pay as much as £135,000 in tax if they take the money as a lump sum.”

That figure may be greatly reduced if the fund remains in drawdown or is shared among other nominated beneficiaries instead, he added.

The money may then retain its pension tax benefits and may not fall into your estate for inheritance tax purposes.

Four out of five adults have either never completed an expression of wish form or do not remember doing so, according to research from Canada Life.

Technical director Andrew Tully said without this your scheme administrator or trustees will decide who receives the money without any input from you.

He said: “The form is vital to help them pay benefits quickly and efficiently, and to the right people.”

Even if you did set out your wishes when first joining the scheme, that could have been decades ago and they may not reflect your situation today,

Tully warned.

He added: “Contact your pension company to make sure that everything is up to date.”