People often consider their pension to be a different type of asset from other types, such as property, bank accounts, cars and investments, but in reality a persons’ pension is another valuable asset and, in some instances, can be worth more than the family home.
That’s why planning for what happens to your finances after you have passed away should include planning for what happens to your pension, in addition to any other assets that you have.
Below, we have outlined some of the important things that you’ll want to consider when making provisions for passing on your pension to your loved ones after your death.
Looking into what death benefits your pension provides
Pension rules and regulations in the UK can be very complex. When considering what happens with your pension after you have died, you will first need to ascertain what type of pension you have, and the pension’s rules for what happens after you have passed away (e.g. how it is distributed).
Some pensions have automatic rules for what happens on your death, e.g. it only provides an income to a dependent on your death. With other pensions, they have greater flexibility as to who you can leave your pension pot to and how it can be accessed.
Complete a nomination of beneficiary form
For pensions that allow you to specify who you can leave your pension to, you can complete a “nomination of beneficiary” form. This informs your pension scheme provider as to who you want to leave your money to. In certain circumstances, the scheme provider may payout to those not nominated by you if they feel that this is the best thing to do.
Completing this is extremely important. If your loved ones aren’t listed on the form, they may not be able to keep the money in a pension, which provides tax advantages. Instead, they may simply receive a lump sum payment.
Understanding how your pension scheme operates and what it offers will help inform you how to write the nomination of beneficiary form. Alternatively, you may want to look at different pension schemes that can provide the options you want to provide for your loved ones.
Tax due on your pension
Your pension could be subject to Lifetime Allowance charges, which are based on the total value of all the pensions you have used in your lifetime and passed on after your death. The standard Lifetime Allowance is, at present, £1,073,100 and any amount above this could be subject to tax. However, you may have or could qualify for a Lifetime Allowance protection that is higher than this.
Income tax could be another consideration for your loved ones and will be dependent on what age you are when you pass away, or when your pension is paid out.
Additionally, whilst pensions are typically free from inheritance tax there can be some instances where it will apply.
Obtain financial advice regarding your pension and passing it on to your loved ones
By obtaining specialist financial advice, you can best understand the rules of your pension scheme, and look at what steps you can take now to reduce any negative impacts for your loved ones after you have passed away.
A financial adviser can review and provide advice on your pension scheme so that it fits in with your overall intergenerational financial plan. This will help to provide you with peace of mind and ensure that when it comes to passing on your pension to your loved ones that it is done in the smoothest and most tax-efficient way possible.