Why pension nomination forms and supporting instructions now matter more than ever…
The proposed inclusion of pension death benefits within the Inheritance Tax (IHT) framework has highlighted a practical issue which many families and advisers may not yet have fully considered.
Many pension funds are still distributed under the discretionary powers of the pension trustees or scheme administrators, even where the member has completed an expression of wish or nomination form. As a result, there can now be three separate layers of instruction:
- The wording of the Will;
- The pension expression of wish or nomination form; and
- The rules and discretion of the pension scheme trustees.
Ideally, all three should point in the same direction. If they do not, executors and beneficiaries may face uncertainty over who ultimately bears the tax burden.
The Practical Risk
A common example may arise where a Will states that pension benefits are to pass to grandchildren “free of tax”, but the pension nomination form still directs benefits elsewhere, or is silent regarding tax apportionment. This can create uncertainty over:
- whether the pension beneficiaries should bear part of the IHT;
- whether the residuary estate effectively subsidises the pension beneficiaries;
- whether the deceased fully understood the consequences of the arrangement; and
- whether the pension trustees were ever informed of the intended structure.
Practical Steps Worth Considering
- Review pension nomination forms regularly – Many nomination forms are years out of date. They should be reviewed alongside the Will to ensure consistency of beneficiaries, percentages and intended outcomes.
- Consider a short, signed letter to the pension provider – A supporting letter can help demonstrate the member’s intentions regarding the destination of pension benefits and the intended treatment of any associated IHT liabilities.
- Keep clear attendance notes – Where one branch of the family is advantaged, or where the estate bears tax on assets passing outside the estate, detailed file notes can become extremely important later.
Why This Matters
Under the proposed pension IHT changes, pension funds may become taxable for IHT purposes even though they remain outside the estate for probate purposes. This can separate:
- who controls the asset;
- who receives the benefit; and
- who ultimately bears the tax.
Careful coordination between Wills, pension nominations and tax apportionment clauses is therefore becoming increasingly important.
Client Reminder:
“Pension nomination and expression of wish forms should be reviewed regularly and kept consistent with the terms of your Will. In some cases, a separate written letter to the pension provider may help confirm how pension benefits and any associated tax liabilities are intended to be dealt with. Clear records can help reduce uncertainty and avoid disputes between beneficiaries.”
If you think this may affect you in any way, please call to discuss your situation and see if you need to make any changes. 079 888 30691 or contact us HERE.
Full summary from Royal London HERE.