Private pensions are crucial to the idea of retirement planning, providing financial security in your later years. But can you nominate someone to receive your pension?
In Scotland, as in the rest of the UK, the administrators (or trustees) of a pension scheme typically decide which beneficiaries will receive the remaining pension funds when a pension-holder dies.
Using their discretion – with the financial needs of potential beneficiaries often taken into account – the funds are generally distributed by the pension trustees to people who were financially dependent on the pension-holder (such as a spouse, civil partner, long-term partner, or, in some cases, a child under the age of 23).
However, pension-holders have the option to nominate someone to receive their pension by making a nomination – otherwise known as an “expression of wish”.
Understanding Pension Nominations
A pension nomination, or an expression of wish, is a declaration made by the pension-holder, naming one or more beneficiaries (known as nominees) who should receive the remaining pension funds upon the death of the pension-holder.
Nominees can include dependents, non-dependents, or even organisations such as charities.
While this declaration is not legally binding, it acts as a guide for trustees or administrators and can heavily influence their decision-making, especially if there are no other clear indications of the pension-holder’s intentions.
Making and Updating a Nomination
Since pension funds are generally considered to be separate from the deceased person’s estate, they are not covered by a Will.
Therefore, to nominate someone to receive your pension, the pension-holder must complete a form provided by their pension scheme provider, typically called an “expression of wish form” or a “nomination of beneficiaries form.” This form will usually ask for:
- The pension-holder’s name, National Insurance number and pension account number.
- The name, address, date of birth and relationship of the chosen beneficiaries.
- The percentage of pension savings each beneficiary should receive.
If the pension-holder has multiple pension schemes, they may nominate different beneficiaries for each scheme.
Importance of Regular Updates
It is essential to regularly review and update pension nominations, particularly after significant life events such as marriage, divorce, the birth of a child, or the death of a previously-named beneficiary.
Failure to update these declarations could result in the pension being distributed in a way that no longer reflects the pension-holder’s wishes or circumstances. In certain circumstances, the pension trustees will pay the pension proceeds to the estate of the deceased – thereby increasing the overall estate value and potentially exposing the estate to Inheritance Tax.
Options for Beneficiaries
On the pension-holder’s death, the nominated beneficiary can choose how to receive the remaining pension value.
Options typically include taking a lump sum or using the funds to purchase an annuity – an insurance contract issued and distributed by a financial institution providing a guaranteed income for life or for a specific period.
Beneficiaries can also pass on any unused drawdown funds to their own nominated beneficiaries, known as successors.
Pension Funds and Tax Implications
Personal pension funds are typically “defined contribution” or “money purchase” schemes, and are subject to different tax treatments depending on the pension-holder’s age at the time of death:
- Before Age 75: Pension benefits are generally paid out tax-free, up to the Lifetime Allowance.
- After Age 75: Pension benefits are taxed as the recipient’s income at their marginal tax rate.
Pension funds in the UK, including Scotland, are not usually part of the deceased’s estate and therefore are not subject to Inheritance Tax. You should confirm this position with your pension provider, however, as some providers may be the exception to this general rule.
This makes pensions an effective tool for estate planning.
Pension-holders can reduce their estate’s exposure to Inheritance Tax by moving savings and investments (which are taxable) into their pension pot, benefiting from tax relief on pension contributions and potentially lowering their overall tax burden.
Get the right legal advice now
Pension nominations/expressions of wish are vital tools for ensuring that your pension benefits are distributed according to your wishes after your death.
While these declarations are not legally binding, they provide crucial guidance to trustees or administrators who have the discretion to allocate your pension funds.
Regularly updating these nominations, especially after significant life events, helps ensure that your wishes are respected and that your loved ones or chosen beneficiaries are provided for.
Understanding the tax implications and legal frameworks surrounding pension funds is also essential in effective estate planning.
By carefully managing your pension nominations and making informed decisions, you can provide financial security for your beneficiaries and potentially reduce your estate’s tax liability.
If you’re looking to sort out your own financial affairs, we can meet with you to discuss pension nominations, estate planning, Inheritance Tax and all other related matter. To book a free consultation, contact us today on 0141 628 5544, email info@weirlaw.co.uk or Make An Online Enquiry
