As a relatively new paraplanning administrator, one of the first tasks I’ve had to get comfortable with is reviewing a client’s existing pension arrangements, to ensure that the financial planner can provide suitable advice.  

    The accuracy of these reviews is crucial to support advice on whether clients should retain, replace, or remodel an existing arrangement.

    As I’m sure you’re aware, the information we are given from pension providers varies in detail but the one question I tend to need to call providers for further clarification on is: “Will the pension form part of the client’s estate upon death?”

    I was surprised by the number of times I had the response ‘yes’ to this question given it’s generally accepted that lump-sum benefits from a pension are usually outside the member’s estate for Inheritance Tax purposes.

    I dug out my R04 Pensions and Retirement textbook and it confirmed as much in four short paragraphs, but it didn’t go into as much depth as we need to consider.

    My experience had taught me that some workplace scheme benefits are paid to the estate, the NHS pension being a well-known example, and there are issues with Retirement Annuity Contracts, but this wasn’t relevant to the plans I’d reviewed.   

    It seemed this wasn’t as straightforward a question as I’d initially believed!   

    So why is it so important that this question is answered correctly?

    • Incorrectly assuming pensions won’t form part of the client’s estate on death could result in us telling a client that they don’t have an Inheritance Tax liability when the pension death benefits may cause one   
    • Where the client already has an Inheritance Tax liability, we could understate the amount of liability they already have and make inappropriate recommendations or miss an opportunity to transfer out into a more appropriate pension where it won’t form part of the estate.

    I spoke to Aviva’s pension death benefits department who confirmed they hold a wide range of pensions, from workplace schemes, personal pensions, legacy arrangements, and they can have differing rules.

    It was reassuring to hear that for most policies, the provider trustees have discretion and will either pay out to the nominated beneficiary, and in the absence of this, will investigate who the most appropriate beneficiary is - typically to the surviving spouse or child. Therefore, we can feel fairly comfortable that where there is trustee discretion, the proceeds are unlikely to be paid to the estate.

    However, where there is no nominated or identified suitable beneficiary there could be instances when the trustees have no choice but to return the proceeds to the estate.

    This is where we need to take care in how the ‘Will the pension form part of the client’s estate on death?’ question is framed when calling providers.

    We always ask about whether there is a nominated beneficiary as it is more common than not that no nomination has been made. If there is no nominated beneficiary, then the question could be answered as ‘yes’ as the provider at that stage has no knowledge of any other next of kin.   

    What is important to establish is whether the scheme has discretionary powers over the payment of any lump sum death benefits. Where the answer is ‘yes’ then it is likely that the proceeds will fall outside of the deceased member’s estate.

    So that covers the majority, what about the rest?

    Aviva confirmed that there are some older schemes out there, typically former workplace pensions, where the scheme rules give no option but to return the funds to the estate. At Plan Works we have seen this with Aviva, Reassure and other providers – not frequently but they are out there!   

    A note regarding NEST

    Care should be taken with reviewing these as the typical terminology used around nomination of beneficiary could, on the face of it, suggest that the NEST death benefits would not form part of the deceased’s estate.

    However, if you see that there is a nominated beneficiary on a client NEST pension this will usually form part of their estate for Inheritance Tax purposes because the nomination is binding (in the same way that a trust is either discretionary or absolute).  

    Clients should ensure that that the expression of wish, a non-binding arrangement, is used where they want to name beneficiaries and not have the pot impacted by Inheritance Tax.

    Conclusion

    For me, the first rule of paraplanning is to never assume! I’ve lost count of the number of times where I believed I had verified information via online research to find out from a scheme provider that the information that was online was not relevant to a particular client’s arrangement.   

    Unless you are 100% certain – whether it’s details around costs and charges or death benefits – a call to the provider can be invaluable.  

    Just make a cuppa first and line up another task you can be doing should you end up on hold...

    Further reading

    As part of my research I found a super Techtalk article from Scottish Widows Reviewing pension death benefits, this is well worth an hour of CPD and highlights the issues faced with schemes that require particular care such as public sector schemes, Section 226/32 schemes and NEST.

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