Death benefits are a contentious and tricky area. In the event of death, the full value of a pension fund can be used to provide lump sum and/or pension benefits to a spouse, civil partner or other beneficiaries.
The trustees of the pension have discretion to select who will receive the benefits but will take account of any beneficiaries nominated in an expression of wish.
If a client is under the age of 75 on death, then the lump sum death benefit will be tax-free providing that payment is made within two years of death, otherwise, it will be taxed at the beneficiary’s marginal rate of income tax. If they were over the age of 75 on death, then the lump sum is taxable at the beneficiary’s marginal rate of income tax.
If the client is under the age of 75 on death, pension payments to a beneficiary will be income tax-free if designated within two years, otherwise, they will be taxed at the recipient’s marginal rate. If you were over 75 on death, then any pension payments will be taxed at the recipient’s marginal rate.
Also, remember any monies left to charities whether before age 75 or after age 75 are tax-free and charity payments can only be made if there are no dependents.
Careful saver
By way of example, a client, Jeff Green had been saving into a self-invested personal pension (SIPP) for many years. He was a careful saver and worked with a financial adviser during his working life. His SIPP amounted to £1,150,000 which was fully crystallised when he died when he was over age 75.
It is always sad when a client that you have known for many years passes away.
He had diligently completed his expression of wish forms, taking into account events in his life that had changed where he wanted to leave his money, such as getting married again later in life. The most recent expression of wish form, as you might expect, left the majority of the SIPP fund to his wife Sarah and to a number of charities that he had supported over the years.
As the instructions in his expression of wish were clear, the money held within his SIPP were paid out to the charities and the balance of the fund was transferred to a beneficiary SIPP for Sarah his wife. Sarah, having assessed her income needs, discussed it with her friends and some extended family, decided that currently, she did not need any additional income from Jeff’s pension.
Unexpected
Sarah then unfortunately died, this was unexpected and less than six months after her beloved Jeff. Despite having decided not to take income, she had not yet completed an expression of wish for herself. It was a difficult time for her emotionally having lost Jeff so soon after getting married.
Jeff and Sarah didn’t have any immediate beneficiaries; they had no children and had, in fact only been married for five years when Jeff died. When investigating the situation, it became clear that Sarah’s current will which was completed before she was married and her solicitor informed the SIPP provider that it was, in fact, invalid.
The will that Sarah had left provided money to a family friend and the rest to a charity close to her and Jeff’s heart. It was understood from the solicitor, that it had been Mrs Green’s wish to leave all her monies in the SIPP to her favourite charity.
On looking at what the HMRC pension tax manual said, it was found that where a beneficiary has received pension funds and there had been no expression of wish, the administrator has to go back and look at what the original member’s expression of wish states.
In this context, Jeff’s expression of wish left monies to five different charities and his wife, the administrator then confirmed that the balance of the fund would go to those five charities. Payment was made and was made gross to the five charities.
‘Heart-wrenching case’
This was a heart-wrenching case, both the administrator and the solicitor knew both parties and as it turned out Sarah did not have the money distributed to the charity she would have wished as this was different from the charities Jeff chose.
The issue here is that the completing the expression of wish form is so important, the solicitor and the pension administrator have their hands tied when there is no completed expression of wish form and it is a great shame that Sarah didn’t have her wishes fulfilled.
It is important for advisers and their paraplanners to have the expression of wishes updated each year or more frequently when big life events take place. To make sure their clients leave their money where they wanted it to go.
Elaine Turtle is director at DP Pensions
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