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Where is your pension going after you die?

Dying before you retire is unfortunate but there is a way to control the money you saved from beyond the grave and help your dependants.

 

by Michelle McGagh on Dec 21, 2012 at 09:00

Where is your pension going after you die?

If you are unlucky enough to die before taking your pension, you can still have some say in where your hard-earned cash can go by putting your pension death benefits into trust.

When you take out a pension you usually have to nominate a beneficiary of your death benefit, meaning if you die before retiring your pension savings are passed on to the person you have selected.

The money that is passed on usually consists of the return of the pension fund plus any life insurance tied to the pension. It is paid out tax free to whoever you want, typically a spouse or partner, or children, so long as the money paid out does not exceed the lifetime pension allowance, currently £1.5 million. If it does exceed this limit the excess money will be taxed at 55%.

Death benefits from personal pensions, stakeholder pensions and other 'defined contribution' (DC) schemes (so called because the amount you pay into the scheme is defined, rather than the pension you receive from defined benefit schemes) are normally paid as a lump sum, according to Andy Zanelli, head of retirement planning at AXA Wealth. By contrast defined benefit (DB) schemes usually pay out an income to the beneficiary, he says.

You decide

Most people are members of DC schemes which means any death benefits would be paid out as a lump sum. Zanelli believes that it is a bad idea to pay any grieving family member a lump sum of money when they are in an emotionally fragile state.

Instead he recommends writing your pension death benefits into trust and requesting that the benefit be paid out as an income in the event of your death.

‘If you want someone to continue their lifestyle but don’t want them to have a lump sum of cash you can say you want the money paid out as an income rather than a lump sum,’ said Zanelli.

‘Having it paid as income through a trust gives people breathing space and it keeps the money safe while the person passes through a traumatic phase of their life. For a lot of people the pension is their first or second largest assets, and you want to keep it safe. ‘

Zanelli said that giving someone a large sum of cash when they are going through a bereavement could attract unsavoury characters wanting to part a grieving partner from their new-found wealth. From a tax planning point of view, Zanelli also said it may not be appropriate to place a lump sum on to an estate as it may affect inheritance tax planning, whereas money ring-fenced in a trust falls outside of inheritance tax.

What does it cost?

If you want to transfer death benefits into trust most pension providers will do this for free, said Zanelli.

He said that when it comes to controlling the death benefits most people ‘do nothing’ and some sign an ‘expression of will’.

‘Most people do nothing [about the death benefits] or they sign an expression of will which is a letter to the trustees of your pension saying I want my money to go to ‘X’,’ he said.

‘This letter isn’t binding though so the trustees can choose to ignore it. It depends on how the trustees view their duties as to whether they take notice of an expression of will. If you set up an appropriate trust then [your wishes] will be binding.’

Once a trust of expression of will have been set up, Zanelli said it must be regularly reviewed.

‘A lot of people do not review their expression of will and who the death benefits are going to be paid to. They may have been married and then divorced but their ex is still the beneficiary,’ he said.

Changing the beneficiaries is one of the perks of writing your death benefits into trust.

‘If you decide you don’t like your daughter’s husband then you can change the beneficiaries of the trust. This is as common as you like and one of the main reasons for setting up a trust – so you can decide who gets your money,’ said Zanelli.

34 comments so far. Why not have your say?

Rob Walker

Dec 21, 2012 at 12:15

Are you sure a pension fund can be paid out to 'whoever you want' ?? I am sure my Unilever pension nominee form explicitly said it had to be my wife, family or a 'Civil partner' but I couldn't nominate my girlfriend.

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dd

Dec 21, 2012 at 12:49

"It is paid out tax free to whoever you want, typically a spouse or partner, or children, so long as the money paid out does not exceed the lifetime pension allowance, currently £1.5 million. If it does exceed this limit the excess money will be taxed at 55%."

Is the 55% tax charge REALLY after the first £1.5 million???

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Dennis .

Dec 21, 2012 at 13:56

I understand that a lady in the US died recently who was in receipt of a pension from the American civil war in the 1850's. It seems that a guy aged about 18 at the time of the war was in receipt of a war pension and died well into his 80's having married, very late in life, an 18 year old who survived well into her 80's. That what I call a good return on an investment.

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mark donovan

Dec 21, 2012 at 15:40

I dont have children my parents will probably die before i do, i dont have an ex-wife, can i leave it to my sister and her children

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Roydo

Dec 21, 2012 at 16:00

Yep. Anyone Mark. Note though, that a legal will usually trumps a nomination form.

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Maverick

Dec 21, 2012 at 17:27

Michelle - The vast majority of defined-contribution schemes (including most personal pensions) are set up under trust already. The same pension fund is used to provide the death benefits and the pension benefits. The legislation forbids the assignment of any part of a pension benefit. So how do you transfer the death benefits to the trustees of a new trust without assigning the entire pension to them? In that case HMRC will deem the assignment an unauthorised payment to the member, and will slap on a tax charge of 40% instantly.

Mr Zanelli is clearly living in the days when personal pensions were insurance policies - which has not been the case since 1988.

This is highly dangerous, and anyone thinking of setting up one of these trusts should consult a good solicitor first.

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Lyndon Edwards

Dec 22, 2012 at 15:30

The article relates to what is sometimes called a Bypass Trust. As the trust is the beneficiary it is then down to the appointed trustees, chosen by the settlor, that's the person who sets up the trust. The trustees will then deal with the funds in line with conditions in the trust. If they leave it in the trust it can be passed down the generations.

@Maverick: you are right that pension funds are already in trust but that is largely to protect against bankruptcy or misuse of funds by an employer. The Bypass trust arrangement is NOT an assignment of funds, which you correctly say is wrong. You cannot assign pension funds as I have had to explain to more than one divorce solicitor. You can appoint a trust as a beneficiary as long as the trust exists before your death. A simple Bypass trust deed and £10 deposit into a trustee bank account is sufficient at this time to put the rust into existence.

@Rob Walker. Your Unilever pension is a defined benefit scheme, which the above article correctly states must be paid to a qualifying beneficiary as income for life unless the scheme trustees agree to pay it into trust.

@dd. If the pension fund is untouched at death, ie: before your age 55, it can be passed on free of tax. If the fund has been opened up to pay either taxfree cash or a drawdown income the 55% rate will apply to the whole fund.

@Mark - yes.

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Maverick

Dec 22, 2012 at 15:55

Lyndon Edwards - I am a solicitor and I have just advised two clients on by-pass trusts. One was set up by a City of London firm of solicitors and the other used a trust document downloadable from the website of a well-known SIPP provider.

Both could only be interpreted, legally, as an assignment of the entire SIPP to the trustees of the by-pass trust. Both referred to the SIPP as a "policy", which it certainly is not.

They also tried to overcome the SIPP trustees' discretion in deciding who should receive the death benefit by giving the lump sum to the by-pass trustees. As I interpret the Inheritance tax legislation, that makes the whole SIPP fund subject to Inheritance Tax.

How do you get the death benefit into the hands of the by-pass trust's trustees without assigning it?

The kind of trust you are referring to is what I would call a "pilot trust", which sits alongside the SIPP member's Will. The SIPP member completes an "expression of wishes" letter asking the SIPP trustees to pay the death benefit to the pilot trust's trustees. But he cannot fetter the SIPP trustees' discretion. They can pay the death benefit to the member's wife or mistress if they are feeling bloody-minded enough.

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Roger Parker

Dec 30, 2012 at 10:47

Will the 55% Tax apply if the fund is in drawdown but no money been drawn

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Maverick

Dec 30, 2012 at 18:27

Roger Parker - It's the "crystallisation" that triggers the 55% tax charge. You would have to consult the Finance Act 2004 to see whether what you have done ranks as crystallisation.

What would be the point of putting your pension "in drawdown" if no money has been drawn? You have to make some kind of positive move to put your pension in drawdown - it doesn't happen automatically when you reach Normal Retirement Age.

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Lyndon Edwards

Dec 30, 2012 at 18:47

@Maverick

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Lyndon Edwards

Dec 30, 2012 at 18:58

@Maverick,

That's interesting! In my experience the bypass trust is usually applied to an ordinary pension contract, not a SIPP, or lump sum death benefit from a DB scheme. The SIPP trustees quite possibly do have more discretion, but as far as IHT is concerned it's my understanding that uncrystallised funds do not attract IHT regardless of the beneficiaries. Neither does the payment of a 5/10 year guarantee.

The only problem with a 10 year guarantee is that unlike a 5 yr guarantee it cannot be commuted, leaving the estate to be administered for the duration of the guarantee. The income is also potentially taxable. I had a case where minors were beneficiaries of a 10 yr guarantee.

I believe that SIPP trustees can vary their powers within their contracts, so they may differ with providers, but I'll certainly want to find out more.

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Maverick

Dec 31, 2012 at 00:13

Lyndon - A pension is never a contract. The old ones were insurance policies, and modern ones are trusts. An annuity might be seen as a contract, but they have strict bars on assignment built in too.

We may be getting into slightly deep legal water here, but if a member of a trust-based pension tries to pass on his beneficial rights to the trustees of the by-pass trust, he is running the risk that HMRC will claim he must be beneficially entitled to the pension fund and it therefore falls within his estate under Section 5(1) of the Inheritance Tax Act 1984. I wouldn't like to be the solicitor who has to argue that one before the Commissioners of Inland Revenue . . . .

The only reason that uncrystallised funds do not attract IHT is that the funds are held by trustees who have discretion as to the payee of the death benefits.

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Anonymous 1 needed this 'off the record'

Dec 31, 2012 at 07:41

What about SIPP sheme?

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dd

Dec 31, 2012 at 08:23

Yes, I have the same question. What about a SIPP? For example a 58 year old with a SIPP, not in drawdown, no pension commencement lump sum taken. Where do they stand with regards to a tax charge?

By the way, thanks everyone for this discussion. It is helpful.

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Lyndon Edwards

Dec 31, 2012 at 10:50

@Maverick,

Thanks for your useful post. How from a legal point of view do we stand where there is a master trust on the pensions, such as Standard Life provides, as opposed to the individual trust arrangements from other providers?

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Maverick

Jan 04, 2013 at 09:47

Lyndon - I think you will find, if you look into them closely, that all large providers' SIPPs are master trusts - for example, in a SIPPDeal SIPP the assets are owned by SIPPDeal Trustees Ltd. So what looks like an individual trust is in fact a master trust with an individual's sub-trust bolted on. Very often unless you specifically request the documents you never see the master trust document.

dd - See my response on 30 December. If your SIPP is not in drawdown and no pension commencement lump sum has been taken, then it probably has not been "crystallised". If you die before crystallising, the whole fund can be paid over tax-free to a beneficiary chosen by the SIPP's trustees. If you die after crystallising, the 55% tax charge applies.

People who get up in arms about the 55% tax charge are ignoring the fact that the previous Labour government applied Inheritance Tax to SIPP pension funds, so if you died after crystallising and passed the fund on to your spouse the total tax charge (Income Tax and Inheritance Tax) came to 82%.

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dd

Jan 06, 2013 at 15:33

Many thanks, Maverick. It was an earlier reference (by LE) to age 55 which confused me.

Yes, I was aware that the 55% is actually a lower tax charge than the 80++% previously but I also realise that "not many people know that", generally speaking, of course.

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Anonymous 2 needed this 'off the record'

Jan 23, 2013 at 01:22

ADVISE WELCOME.

I am just about to receive a private pension at 65, that i transferred money into some 28 years ago. It gives me an annual pension,and my surviving spouse or cival partner a pension of half of the G.M.P part of the pension if i die.

The problem is , she is not my spouse, we are not married ,

I have written to the insurance co. stating, i have informed the co. some

years ago that we were not married and wanted her to receive the second pension,(no copy kept)

as she was my partner of the last 20 years. They said no we will only pay a pension to her if she is legally my spouse/wife.I wrote to them to ask how comes up to year 1993 on your annual statement /bonus sheets you send me it states dependant's pension and the amount, and statements after it states spouse pension.

why did it change,why was i not informed that my partner would not be entitled to the pension? . They wrote to me still stating she has to be my spouse to receive the second pension.

we are quite happy as we are and don't want to marry.

what's the answer? thank you

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Anonymous 2 needed this 'off the record'

Jan 23, 2013 at 01:22

ADVISE WELCOME.

I am just about to receive a private pension at 65, that i transferred money into some 28 years ago. It gives me an annual pension,and my surviving spouse or cival partner a pension of half of the G.M.P part of the pension if i die.

The problem is , she is not my spouse, we are not married ,

I have written to the insurance co. stating, i have informed the co. some

years ago that we were not married and wanted her to receive the second pension,(no copy kept)

as she was my partner of the last 20 years. They said no we will only pay a pension to her if she is legally my spouse/wife.I wrote to them to ask how comes up to year 1993 on your annual statement /bonus sheets you send me it states dependant's pension and the amount, and statements after it states spouse pension.

why did it change,why was i not informed that my partner would not be entitled to the pension? . They wrote to me still stating she has to be my spouse to receive the second pension.

we are quite happy as we are and don't want to marry.

what's the answer? thank you

report this

Anonymous 2 needed this 'off the record'

Jan 23, 2013 at 01:22

ADVISE WELCOME.

I am just about to receive a private pension at 65, that i transferred money into some 28 years ago. It gives me an annual pension,and my surviving spouse or cival partner a pension of half of the G.M.P part of the pension if i die.

The problem is , she is not my spouse, we are not married ,

I have written to the insurance co. stating, i have informed the co. some

years ago that we were not married and wanted her to receive the second pension,(no copy kept)

as she was my partner of the last 20 years. They said no we will only pay a pension to her if she is legally my spouse/wife.I wrote to them to ask how comes up to year 1993 on your annual statement /bonus sheets you send me it states dependant's pension and the amount, and statements after it states spouse pension.

why did it change,why was i not informed that my partner would not be entitled to the pension? . They wrote to me still stating she has to be my spouse to receive the second pension.

we are quite happy as we are and don't want to marry.

what's the answer? thank you

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Dennis .

Jan 23, 2013 at 09:14

Easiest course of action is to get married surely. Highly recommended and removes all sorts of legal issues about inheritance tax etc unless of course, one of you is already married .

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Anonymous 2 needed this 'off the record'

Jan 23, 2013 at 13:19

Yes Dennis I agee with you but my partner/ex does not wan't to remarry me.

Its her choice ,she is taking a chance of loosing a pension of almost £3000 a year for the rest of her life, if i die first, she thinks she as a ex 20 year smoker will go first, I just wan't to leave her a pension that i have paid for if i die first.

and am trying to find a way around the spouse part, I have told her if i am on my dying bed ,you will just have to marry me for the money.nothing else i can

do .unless some one got the answer. thanks

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dd

Jan 23, 2013 at 13:52

That brings up another question, and we don't need to know ... but in the circumstances, I hope that you have made a Will.

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Dennis .

Jan 23, 2013 at 14:52

Reminds of the story about the guy who wanted to be buried with all of his money. So the family put a cheque in the coffin......

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Dennis .

Jan 23, 2013 at 14:58

Anonymous 2 Just a thought but if you told the insurance company that she was your spouse would they check up on it I wonder. Unless they ask for a marriage certificate who is to know?

Other point is that my company pension has special arrangements for single pensioners who have never married and don't intend to. They get a higher payout. Is this common?

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Anonymous 2 needed this 'off the record'

Jan 23, 2013 at 18:52

Dennis ,i am almost sure they ask for a marriage certificate from her if i died

to prove she was my spouse,the problem with my policy it states spouses

pension. not dependents pension, even tho as stated from 1987 to 1993 the

yearly annual statements state dependents pension ,i was hoping a legal

person who reads this mite say ,you got a strong case due to them changing the wording on the annual statements .

dd yes we willed everything to each other.

ow well lets hope for her sake i don't die suddenly ,before her.

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Dennis .

Jan 23, 2013 at 19:07

Then I guess it's a simple financial discussion about the question

"is it worth being married to you for the sake of £3k/year for life?" simple enough. Very similar to what an inheritance tax consultant once said to me. "At the end of the day, inheritance tax is not your problem".

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Maverick

Jan 23, 2013 at 21:58

Anonymous 2 - For heaven's sake, all this palaver about not wanting to get married is completely unnecessary.

Find a self-invested personal pension which does treat partners as spouses, and transfer the pension into that before you start drawing it.

Problem solved.

You may need to spend £150 or so getting advice from an IFA, but that's probably better than your partner losing £3,000 a year for life.

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Dennis .

Jan 23, 2013 at 22:29

and get her to pay the £150

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Anonymous 2 needed this 'off the record'

Jan 23, 2013 at 23:43

MAVERICK. DENNIS

I like the idea of of moving my pot worth some 61000 , but i know i got a very

good deal with the insurance co. i am with at the moment ,transferred approx.

6,700 in 1987, to a pension policy with profits that you keep, v.good for the first few years 5.1% last 15 years .5% but still gives me a pension of 5,860 and a surviving spouse pen. of almost 3,000 , i have looked into it ,but there no way i am going to beat this sort of pension with a 61,000 pot unless you know better

I will just have to make sure i out live her,plenty of exercise down the gim and no eating dripping sandwiches any more, well chaps you have been v. helpful

thanks for the advise.

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Maverick

Jan 24, 2013 at 12:31

These guaranteed annuities worry me. If Anonymous 2's life expectancy is (using the latest Office for National Statistics' figures) 21 years, how can the insurers afford to pay the annuities while gilt yields remain so low?

Add to that the fact that many pensioners retiring now are refusing to buy annuities because they are such lousy value for money. With the information free on the net a lot of pensioners are making investing a hobby and doing rather better than many of the so-called professionals. This means insurers will have even less money coming in that they can invest.

Look what happened to Equitable Life. We only need one major insurer to go belly-up and the whole annuity edifice will fall to the ground.

Anonymous 2 - your guaranteed annuity is perhaps a little more risky than you think . . . .

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Anonymous 2 needed this 'off the record'

Jan 24, 2013 at 20:43

The corrected details of my buy out pension,for your interesting reading.

When i left the co. i was working for in 1985 age 40 i was offered a pension by them at 65 i would get a pen. of 5,958.12&widow pen of 2,979.12. . I decided to go for a buy- out sum of 6,672.61 into GRE with a could provide a cash sum of

145,5166.50 made up basic sum of 3,4147.41 pluss assumed bonuses of 111,019.10,great bonuses to start with 244.25 first year dropping to .5%from 2004 £16.47 up to retirement now . giving me a pen. of £5,860 &spouse pen of almost 2972.00. when i die, if i wan't to transfer to purchase a annuitie some were else the pot worth 62,000,

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sally edwards

Sep 23, 2013 at 19:09

I know this link is old but hope you can advise me still. I have been lucky enough to have been the sole named beneficiary on a private pension by a friend. The company have not been very helpful or speedy in resolving this. My friend made his final will in Spain and died there last year after living in Uk pretyy much all his life except the last 6 months. I notified the pension company as i dealt with his finances for many years to be told that they would not be progressing with the claim but i could obtain a copy of his death certificate to get it started which i paid for and sent them, they then said they needed a copy of the will which my friends daughter would not let me have but she said i or the private pension were not mentioned. I paid for the name of the Spanish notary who was dealing with the estate and gave it to the pension company as they said they would then request a copy of the will. This took them 2 months to do and then the solicitors had changed hands. I am very frustrated as i am once again told the matter will be proggressed without the will. I have now found a solicitor in Uk who has a copy of the will but the pension solicitors have said that they can request a copy at the address i have supplied them with but they have no right to demand a copy?? i find this obsurred as this is the document they apparently have to have in their possession. Surely in this position the solicitor that holds the will is legally bound to supply it to them? Or can i instruct a solicitor at my own cost to forward it to them direct? Also i would like to know if i was mentioned in the will as his daughter in Spain will have no contact with me and i think it is because i am named. Any advice most welcome!!

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