Following the landmark changes to the way in which pension funds can be distributed after a member’s death, the number of nominations that have been updated has increased by over 350% in the past four months, compared to the same time period last year.
Billy Mackay, Marketing Director at AJ Bell, said: “The new rules make it more important than ever to regularly review nominations at key life events and ensure funds are passed on in the most tax-efficient manner.”
Historically, only dependants were able to receive death benefits as a pension. The new rules enable the payment of death benefits, as a flexi-access drawdown pension, to two new classes of beneficiaries – nominees and successors – in addition to dependants. A nominee is an individual who has been nominated as a beneficiary by the member. Where the deceased member had not made a nomination in their lifetime, the scheme administrator is able to nominate a beneficiary to be a nominee, provided the deceased member has no surviving dependants.
If the scheme administrator chooses not to pay benefits as per the deceased’s nomination, and there is a surviving dependant or a nomination in place, the chosen recipient will not be able to take the death benefits as a pension; they’ll only be able to receive them as a lump sum. Flexi-access drawdown death benefits can only be paid to a dependant, nominee or successor. The scheme administrator always retains the right to use their discretion to pay a lump sum to any beneficiary, whether nominated or not.
Mackay continued: “We have had a huge amount of interest in our updated nomination form in light of the new rules and this, coupled with the sharp increase in the number of nominations reviewed and updated, makes it clear that many advisers are making this a priority.”
Notes
The following case study highlights the importance of keeping a nomination up-to-date.
- Mr Williams dies aged 85. His wife has predeceased him and he has nominated his only child (John) to receive his benefits.
- John is 55 and a higher rate tax payer, so would pay at least 40% tax on any benefits he took as income. John has two children who are 18 and 20 and are currently at university with no income.
- John does not need the income and would rather the fund was used to provide an income to support his children whilst they are at university and starting their careers. This would be more tax-efficient, as they could receive the first £10,600 each year tax-free (2015/16 threshold), and pay basic rate tax on any income above this up to the higher rate threshold.
- Even though all parties are in agreement, and John believes his father would have supported this change, the fact that Mr Williams’ nomination states that John is the beneficiary means the scheme administrator cannot override this to designate the funds to provide an income for John’s children.
- The scheme administrator does have the ability to pay the funds to John’s children, but this can only be as a lump sum and would currently be taxed at 45%.