When you build up a money purchase pension, you’re not just planning for your own retirement, you’re also creating a fund that could help your loved ones after you’ve gone. One of the simplest, yet most important, steps you can take is to make sure you have a death benefit nomination (also known as an expression of wish) in place.
This document tells your pension provider who you’d like to receive the value of your money purchase pension when you pass away. While not usually legally binding, it provides strong guidance to your provider and makes it much clearer how your pension should be distributed.
If you don’t complete a nomination, your pension provider may instead look to your Will, which could limit your beneficiaries’ options. That’s why keeping your nomination up to date is just as important as reviewing your Will.
What options does a beneficiary have?
The options available to a beneficiary of a money purchase pension depend on whether they are named on your death benefit nomination.
- If named, the beneficiary usually has flexibility. They can continue the pension in their own name or draw money out in stages, giving them more control over how they access the funds.
- If not named, the beneficiary is generally restricted to receiving the value as a lump sum. This can cause significant tax consequences, particularly if the pension holder passed away after the age of 75.
The tax position
The age at which you pass away makes a big difference to the tax your beneficiaries might face:
- If you pass away before age 75, any withdrawals from your pension by your beneficiaries are usually tax-free.
- If you pass away after age 75, withdrawals are subject to income tax at the beneficiary’s marginal rate.
This means that careful planning and clear nominations can make a substantial difference to the tax your family or chosen beneficiaries may end up paying.
A practical example
Imagine an individual earning £40,000 a year, making them a basic-rate taxpayer. If they inherit a £150,000 pension pot from someone who passed away after 75, but are not named on the nomination, they might be forced to take the entire amount as a lump sum.
Their total income for that year would rise to £190,000, pushing them into the additional rate tax bracket. They would also lose their personal allowance, resulting in a much larger tax bill than expected.
If that same individual had been named on the nomination, they could instead take smaller withdrawals over time. This flexibility allows them to spread out the tax impact – and in some cases, pay little or no additional tax at all.
Why review your nominations regularly?
Life changes, whether that’s through marriage, divorce, having children, or supporting other dependents. Therefore, your pension nominations should also change. Failing to update them could mean your pension is paid to someone you no longer intend, or that your beneficiaries face unnecessary financial complications.
Reviewing your nominations every few years, and whenever your personal circumstances change, is a simple way to make sure your wishes are respected.
How we can help
At Tees, our financial advisers and solicitors work closely together to help you protect your wealth and provide for your loved ones. We’ll review your pension arrangements, check that your nominations are up to date, and make sure they align with your wider estate planning, including your Will and inheritance tax planning.
This joined-up advice means you can be confident that your family, or any other beneficiaries you choose, will receive the support you intended, in the most tax-efficient way possible.
Next steps
If you would like to review your pension death benefit nominations or discuss how they fit into your broader estate planning, speak to one of our advisers today. A short conversation now could save your loved ones unnecessary tax and stress in the future.
This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice. Some information quoted was obtained from external sources we consider to be reliable. All information is correct at the time of writing.
Tees is a trading name of Tees Financial Limited, authorised and regulated by the Financial Conduct Authority (FCA), Registered number 211314, and registered in England and Wales (Company number 4342506).
