Why you need a ‘will’ for your pension

A properly written will ensures that your assets end up where you want them when you die. But did you know you should also do the same for your pension?

Unlike your property, savings and other investments, your pension does not form part of your estate on your death, and that means it won’t be covered by your will.

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Exactly who gets your pension savings when you die is, perhaps rather surprisingly, down to the discretion of your pension provider. It will make its decision based on any information it has or manages to acquire once you have died.

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In order to help them make these decisions, providers ask policyholders to complete an ‘expression of wishes’ or ‘nomination’ form. This allows you to tell them what you want to happen to your money in the event of your death.

Although it may not have been compulsory to complete it, you will have received one when you first opened your pension. “When people are doing the paperwork, they are thinking about their pension and where they will invest the money. They often put death benefits on the backburner,” says Martin Tilley, director of technical services at Dentons Pension Management.

However, failure to complete your form could cause a lot of problems for those you leave behind.

At best, without any instructions from you, there may be a delay in paying your pension to your dependants; at worst, it could create an expensive tax bill or go to the wrong people altogether.

“Your loved ones may need the money quickly, but if we don’t know where the money needs to be paid we will need to do some investigating,” explains Mr Tilley.

“We may look to the will for guidance, but all of this takes time – often several months. We need to make sure we have investigated everything properly in case our decision ends up being challenged.”

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The provider may also need to consult the executor of your will to find out more about what you would have intended.

Yet, however thorough the provider is, there is no guarantee that its decision will be the same as yours.

Andrew Tully, pensions technical director at Retirement Advantage, adds: “We will investigate potential beneficiaries and then make our own decision. It may well be a partner or child, but it is not uncommon for people to have complicated family situations.”

Likewise, while a will may provide a good indication of how you want your wealth to be distributed when you die, following the pension freedoms this may not always be the case.

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As of April 2015, money left in pensions can be passed on to anyone you like – they do not have to be your spouse or a financial dependant. If you die before your 75th birthday, that money can be passed tax free and if you die after turning 75, income tax only becomes payable when your beneficiaries start to withdraw the money.

Coupled with the fact that the money won’t be subject to inheritance tax (however old you are when you die), pensions are now a very useful weapon in the tax-planning armoury. Danny Cox, a chartered financial planner at Hargreaves Lansdown, says that the death benefits on pensions are now so good that you may want to hold on to your pension for as long as you can. “In many cases, it’s now better to spend non-pension savings before you spend your pension,” he says.

This will be particularly important for those who want to pass money down to younger generations without lumbering them with a big tax bill.

“If a client has a pension and the spouse doesn’t need the money it might make sense to leave it to the children or grandchildren, bypassing the problem of money going back into the estate [where it would be subject to tax].”

Mr Tilley adds: “This is a tremendous tax-planning opportunity. However, if your grandchildren [or whoever you want to inherit] aren’t listed on the expression of wishes form the pension company won’t know that you want the money to go to them.”

On your death, your beneficiaries can have the choice of taking the money as a lump sum or leaving it invested and withdrawing it as they need it – which, again, would allow them to manage their tax position. However, Mr Tilley warns that not all pensions are geared up to allow policyholders to fully take advantage of the pension freedoms. “It’s important to check your scheme has the flexibility to do this.”

If it doesn’t you may want to consider a transfer to one that does.

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However, while pension providers will seek to accommodate your wishes, they do have a legal duty to ensure that money is paid to the appropriate people and, as such, it’s important to note that expression of wishes forms are not legally binding.

Mr Cox explains: “If, for example, you’ve left a pension to a person that you are unconnected to, but have dependent children, the pension company would have to look into it. They need to make a decision they can defend.”

He does, however, add that such interventions are very unusual and if anyone was not happy with the decision made by the pension trustees they do have the right to challenge it via the Financial Ombudsman Service.

The fact that these forms are not legally binding is not a reason to ignore them. Whether you didn’t complete the expression of wishes form when you set up your pension, or you did it so long ago that your circumstances have changed, it’s important to get in touch with your pension provider to make sure they know where you would like your money to go.

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As Mr Tilley says: “If you don’t complete the form, you are opening the door for something to go wrong.”

5 tips for a hassle-free inheritance:

1. Name all of your intended beneficiaries to avoid any confusion. “A husband might say leave 50% to my wife and 50% to the children. But is that ‘our’ children only, or should it include children from a previous marriage?” says Martin Tilly, director of technical services at Dentons Pensions Management.

2. Also include your beneficiaries’ relationship to you.

3. As with wills, quote proportions as percentages rather than fixed sums as you don’t know how much money will remain when you die.

4. Make life as easy as possible for your executors. “Get a copy of your expression of wishes form and leave it with your will,” suggests Danny Cox, a chartered financial planner at Hargreaves Lansdown.

5. Update your expression of wishes form whenever your circumstances change or you update your will. Pension companies should allow you to do this free of charge. “An IFA will get you to review it regularly, but if you don’t have one it’s important to contact the company yourself,” adds Mr Tilley.