When you open a pension, become a member of a death in service scheme, or take out a life insurance plan, you will be asked to nominate a beneficiary who receives the proceeds of the plan when you die (also known as making an ‘expression of wish’). It is important that you make this nomination and review it regularly to ensure that it reflects your wishes and the money goes to the right person.
Pensions and death in service schemes
Pensions and death in service schemes are normally automatically written under a master discretionary trust. This means that on your death, the death benefits from the plan are paid out under a trust and the trustees have discretion over who to pay the benefits to. You are not able to choose the trustees yourself as your pension provider or employer will, in effect, act in this capacity.
By nominating a beneficiary or beneficiaries, the trustees can clearly see where you want the money to go. They will be guided by your instructions, although they are not obliged to follow your choice (but cases of them not doing so are rare). Without a nominated beneficiary, the trustees will be forced to make their own decision over who should receive the money, which may not be in line with your wishes.
Making a Will is an essential part of estate planning, but as the death benefits from pensions and death in service schemes are paid out under trust, the proceeds do not form a part of your estate for Inheritance Tax purposes. Consequently, the distribution of the money will not automatically follow the terms of your Will, although the trustees may be guided by it in the event of no nomination being made prior to your death.
Depending on the type of plan you have, death benefits from a pension can either be paid out as another pension, a lump sum or both. You can nominate anyone to receive a lump sum, but the payment of a pension may be restricted to your dependants. It’s important to remember that if the pension plan permits the proceeds to be paid as a pension to a non-dependant beneficiary, that person must be nominated in the ‘expression of wish’. If no such nomination has been made and a dependant survives you, the trustees will only be able to pay a lump sum to the non-dependant beneficiary. If the non-dependant beneficiary has been nominated and they receive a pension on your death they can nominate a successor beneficiary themselves to continue taking any remaining income from the pension on their own death.
Under a death in service scheme, a lump sum benefit will be paid in the event of your death while you are still an employee for the company which operates the scheme. The amount payable is often linked to your salary.
Life insurance plans
Unlike a pension or death in service plan, when you take out life insurance, the policy is not automatically written into trust. In the event of your death, the proceeds will form part of your estate and could be subject to Inheritance Tax.
If you take out a new life insurance plan, you might want to think about writing the policy into trust from the start. You can select your own trustees, who should be people that you feel will have a good understanding of your circumstances and wishes, and will make sure that the proceeds from the policy are distributed appropriately. You can also choose your beneficiary or beneficiaries.
If you have an existing life insurance plan, it is often worth regularly checking the purpose of the policy and if it still meets your needs. You should also check whether the policy is written into trust and if so, if there are at least two trustees named. If not, now may be a good time to make any necessary changes.
Managing your beneficiaries
If you cannot remember if you nominated a beneficiary or beneficiaries, you should contact your pension provider, employer or life insurance company to check. They can then advise you on their own processes for making or changing a nomination.
It is also important to ensure your nomination is up to date as it might have been some time since you made your choice and your circumstances may have changed. For example you may have divorced and your ex-spouse could still be named as a beneficiary or you may have had children who you wish to benefit from the plan.
Talk to Evelyn Partners
If you have any questions about nominating beneficiaries, pensions or life insurance plans, speak to Evelyn Partners. You can either book an appointment online or call us on 020 7189 2400.
This article was previously published on www.tilney.co.uk prior to the launch of Evelyn Partners.