This form lets you nominate who you want to receive your pension when you die. While the pension scheme administrators have some discretion, they usually follow your instructions unless there's a good reason not to.
There are different options for who can receive the pension benefits: dependants*, nominated individuals, charities, and trusts. Dependants and nominated individuals can choose to receive a lump sum or regular pension income, while charities and trusts can only receive lump sums.
It's essential to nominate beneficiaries, especially if they're not dependants. If you don't nominate someone and you have a surviving dependant or another nominated person, the administrators can only pay out benefits to the non-dependant as a lump sum.
If a lump sum is paid out, it becomes part of the beneficiary's estate for inheritance tax purposes. But if it's kept within a beneficiary's pension, it can continue to grow with no tax on income and gains, and this inherited pension will also remain outside of the estate of the beneficiary. Plus, the beneficiary can access the pension immediately and therefore before the usual retirement age.
Tax rules for death benefits
If the member dies before age 75, death benefits from a pension are tax-free if paid as income. Any excess lump sum over the allowance will be taxed as income for the beneficiary. So, it's crucial to nominate all potential beneficiaries to allow for tax-free income before age 75.
After age 75, death benefits are taxed at the beneficiary's marginal rate. Lump sums are added to the beneficiary's income and taxed accordingly. But with a beneficiary's pension, tax is only paid when the beneficiary withdraws income, providing more flexibility and potentially lower tax liability.
What to do next
If you want someone besides a dependant to inherit your pension, update your expression of wish form to nominate them. This gives your chosen beneficiaries flexibility and can reduce the tax they'll pay on the pension benefits they receive.
If you would like to discuss the implications and the importance of your expression of wish with an adviser, please get in touch.
Please note, the value of your investments can go down as well as up.
Netwealth offers advice restricted to our services and does not provide independent advice across the market. We do not offer advice in relation to tax compliance, personal recommendations with regards to insurance and protection, or advise upon the transfer of defined benefit pensions.
* Dependants are classified as:
- Spouse or civil partner
- Dependent children under 23 or those with physical or mental impairments
- Anyone else deemed financially dependent by the scheme administrator at the time of death.
