Pensions Death Benefits - Pay less inheritance tax

In financial services we have many conversations with pension providers as part of our day to day work. With the changing rules around pensions, the providers are getting more concerned about how they process death benefits from a pension. We have conversations regarding the strength of an expression of wish versus the strength of a trust deed or a will.

So far pension providers are becoming more militant in how they are interpreting the expression of wish document, they are beginning to perceive it as absolute, although technically it isn’t, and for important reason. This is because if the expression is binding on the trustee then the pension fund member has created either an absolute or discretionary trust – which is different to a pensions trust, and therefore the money would fall into the unauthorised payments regime and fines of up to 55% apply to the pension fund. It is crucial that the pension trustees have discretion to ignore the beneficiary under the rules of the trust deed and that beneficiaries do not create binding wishes for their benefits.

However, because of the need to remove business risk, pension trustees are treating these expressions as almost binding as they have little else to go on. Unless the money is going to be received by a fraudster or a terrorist, these ‘Expression of Wish’ documents are being treated as sacrosanct.

Indeed, this has always been the case and we are not aware of a single case where the pension trustees have gone against the wishes of the previous beneficiary (the pension owner).

What is becoming more important is the need for people to write one and update the wishes they have – if the trustees do not have a valid expression of wish letter for each pension arrangement then difficulties might arise, and the trustees might argue that without direction from the beneficial settlor of pension benefits they must settle the monies into the residual estate and is then taxable. This is a real risk going forwards, as many of the pension companies have indicated. Our contacts from Standard Life, AEGON, Aviva, AXA and LV= have already indicated this seems to be the direction of travel and it is only a matter of time before a precedent is set.

As well as this comes a huge problem in the form of flexibility. When you buy a pension you want to be able to access all the flexibility that the law permits. Some pension companies do not accept something called dependents drawdown – meaning that you may not be able to pass on your pension to your wife and children etc. Whilst it is possible they could receive cash instead, it would obviously be much better to leave the money in a completely tax free environment where they pay no inheritance, income or capital gains tax.

Either way, it is imperative that you review what they have on a regular basis. If you cannot for whatever reason, we offer a comprehensive and competitively priced review service that will make sure you keep on top of all rule changes.

We offer all new clients a free initial meeting at any of our eight regional offices to discuss your position and plans. Please contact Hannah Rogers on 01780 764145 or by email to hannah.rogers@chattertons.com to arrange an appointment to see one of our advisers.