The pension freedoms introduced in 2015 should have made it a lot easier to be able to deal with the death of a client with regards to pensions.
However, we all know pensions are anything but simple and scheme rules play just as much a part in planning as the legislation that creates the options for the schemes.
Expression of wishes
Although the benefits in a pension are usually paid out at the discretion of the scheme trustees or administrators, they need guidance from the member on how this happens when they are gone.
This process is done through a ‘one and done’ form that the client won’t typically review on a regular basis if not reminded to by their adviser. So, why is it so important?
Well, firstly, things change. Any change in personal circumstances could trigger a review of the expression of wishes and not just those directly relating to the member but any of their named beneficiaries. More importantly, though, any potential new beneficiaries, such as a grandchild being born.
It is important to remember that if the desired outcome on death is beneficiaries drawdown and the beneficiary isn’t a financial dependent, they need to be named on the expression of wishes.
It is good practice to name all those that may be in line to benefit and then leave additional instructions with regards to the more intricate details. This could be in a letter that sits alongside the expression of wishes and sets out the splits, should one of the beneficiaries not be alive or not want the funds.
It can also give guidance on things such as why people have been excluded, so it is clear they haven’t just been forgotten. If it isn’t documented, then those making the final decisions won’t know the client’s full wishes.
Reviewing an expression of wishes with a client and them not requiring any change should be documented too.
If a provider holds an expression of wishes that is years old, then they may be more inclined to question it, so updating the details on file – both yours as the adviser and the scheme to confirm no change or even an updated form sent in – can save a lot of time and effort at a difficult time.
Trusts
Spousal bypass trusts are probably used less these days because of all the options provided under legislation to retain funds within a pension and outside of the estate.
However, there are some schemes that still don’t provide a drawdown option, either in life or on death and there is always the issue with death in service payments which can only be paid as a lump sum.
In previous years, it was fairly standard to create a trust to receive death benefits from a pension scheme, should it be needed. If not needed, it would generally fall away on death or the small payment used to establish it distributed.
Now with the Trust Registration Service (TRS) and the 45% tax charge on death after the age of 75, this practice is less popular. We should remember there really are good reasons to use trusts with pension planning and they shouldn’t be dismissed too quickly.
The TRS does add an extra layer of complexity now, with the need to ensure contact details of the trustees are kept up to date, as well as registering the trust in the first place. Older bypass trusts (pre 6 October 2020) don’t need to be registered until they receive assets.
Just with the expression of wishes, it is important to keep the letter of wishes to the trustees of the bypass trust up to date and complete, as well as reviewing the trustees and ensuring they are still capable to act.
The most important thing to understand with regards to pensions death benefits is what is and isn’t available under each of your client’s schemes. If they won’t pay out to a trust, there is no point in establishing one. If they don’t provide beneficiaries drawdown then, on death, this could cause additional issues and you can’t change these things once the client has passed.
Claire Trott is divisional director, retirement and holistic planning, at St. James’s Place
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