Next time you have a pension review and are expecting to focus your time on planning for a happy and well-funded retirement, don’t be surprised if your adviser moves on the conversation (delicately, of course) towards what should happen in the case of your death. It isn’t a morbid fascination, in fact since new legislation came into force at the beginning of April this year, the ability to nominate a beneficiary to pass your pension to if you die just got a whole lot more valuable.
In fact, if you die before the age of 75 you will be able to pass your remaining defined contribution pension to anyone as a tax free lump sum, whether it is in drawdown or uncrystallised. And the person receiving that pension will be able to access the funds in that pension tax free, whether they take them as a lump sum or through a draw-down arrangement.
If you die over the age of 75 you will still be able to pass your defined contribution on through your estate. The beneficiary will be able to access the funds flexibly (and at any age) but will pay tax at the marginal rate. For this tax year only (2015/16) if they decide to access the full lump sum payment the charge will be 45%, but this is a transitional measure and will end at the end of March 2016.
This reduction in the potential tax burden in the event of your death means that it is now even more important to understand the size of your estate, and the financial stability of your beneficiaries. This effective growth in size of your estate (where you have a defined contribution pension pot) may mean that you make different decisions about how to distribute your wealth upon your death.
There is an interesting quirk to the rules though. Any decision you make regarding your pension pot in the event of your death has to be approved by the Trustees of your plan. In effect, your nominations form is a proposal to the trustees which they can actually disregard if they feel it necessary. This might well stop you leaving it to your cat.
These new rules (which are part of the Pension Freedom 2015 legislation) could make a big difference to your loved ones, and of course they make it even more important to clarify your wishes in the event of your death. As always, we think it makes sense to get good advice from a pensions expert. If you need help, why not get in touch?