The importance of nominating your beneficiaries
Deciding what happens to your pension when you die might not be front of mind, but it could give you peace of mind.
We’re not really programmed to talk about death. Let alone plan for when we’re no longer around. Something we touch upon in our How to Die Well book. As a result, deciding what happens to the money in your pension is one of those things you might keep putting off, never get round to or just don’t keep on top of.
So, why is nominating your beneficiaries and keeping them up-to-date important?
It's all about your wishes
By nominating your beneficiaries you’re telling us who you’d like to receive the money in your pension when you die. In doing so, you’ll know we’ll aim to carry out your wishes when the time comes. Giving you some peace of mind.
Of course, family tend to be front of mind when passing on your money but it’s becoming more popular to leave some money to charities. This often links to people’s beliefs or where they received help and want to give something back, so others can benefit from their good work.
There’s more flexibility
Whether you’ve turned your pension in to an income or not, your money can generally be passed on. And when you nominate your beneficiaries, it means your beneficiaries can decide how that money is paid to them. There’s a choice of a lump sum or it could be provided as an income.
If you’re already taking money as a secure regular income through a joint life or guaranteed annuity, this can also be passed on to your beneficiaries.
Pensions aren’t generally subject to inheritance tax when you die. But there are some things to keep in mind if you die:
- before the age of 75 and leave money in a defined contribution pension, your beneficiaries don’t pay income tax on the money they get.
- after age 75, your beneficiaries will pay tax at their marginal income tax rate on any money taken.
If you’re receiving money from a defined benefit pension, this will be taxable whatever age you die at.
Remember, tax treatment depends on the individual's circumstances and can be subject to change.
Your decision could make a difference
When you add your beneficiaries to your plan it’s done as either at our discretion and or your direction. Discretion is the more commonly chosen option.
- Discretion is where we’re allowed to use our discretion, based on information we have, when deciding who should receive the money from a pension. Although we have the details of your beneficiaries, we don’t need to follow your wishes. So, if your circumstances have changed, and your beneficiaries weren’t changed to reflect this, we’ll be able to take that into consideration before any money leaves your pension. Choosing discretion also usually means the value won't normally be included in your estate and won't be subject to inheritance tax.
- Direction is where you can tell us exactly who should receive the money in your pension. We’ll carry out these wishes for you and won’t consider changes in your circumstances. If direction is picked, it will normally be as part of your estate and inheritance tax would need to be paid by those getting the money from your pension, although if it’s paid to your spouse, the spouse’s exemption from inheritance tax would apply.
Your life changes - so can your beneficiaries
Personal circumstances change all the time, and in different ways. Whether it’s getting married, divorced, having children, or even grandchildren. When these life events happen, it’s important as these could affect your decision on who gets the money from your pension.
If you don’t keep your beneficiaries up-to-date then your wishes won’t be fully expressed for us or your beneficiaries.
It makes things easier for those close to you
If you don’t nominate your beneficiaries, those you leave behind will be left to pick up the pieces at what could be a difficult time. They could have more paperwork to go through and decisions to make they weren’t expecting. All the while they’ll be dealing with their loss along with other financial decisions. It also means we can’t take your wishes into account when settling the death benefits if we ‘re using our discretion in deciding upon the most appropriate beneficiaries.
When it comes to things like estates and inheritance tax it’s always good to get financial advice. It can be complicated and everyone is different.
If you’re finding it hard to add or keep on top of your beneficiaries you can find out more about making sure the right person gets your pensions.