Why it’s important to complete a pension nomination form
Your private pension is separate from your will, so you need to think carefully about what happens to your money when you're no longer around. Fabian Taylor, Nottingham-based Chartered Financial Planner and Partner from our sister company Page Kirk Financial Services, explains the importance of nomination forms.
According to a recent report from the Office of National Statistics, private pension wealth represents a greater share of household wealth than property. With private pensions being such an important part of an individual's overall wealth, it is important that a nomination form is completed.
What happens to my private pension on death?
Private pensions are not covered by your will. It is the trustees/administrators of a money purchase pension (also known as defined contribution pensions) that decide where any death benefits should be paid. The trustees are guided by a nomination form or expression of wish form completed by you while you are alive.
Death benefit rules were changed in 2015, with the introduction of pension freedoms. Any money remaining in a money purchase pension on death can be passed on to beneficiaries nominated by you.
Nominated beneficiaries normally have three options available to them in terms of how they can draw the money from a money purchase pension:
- Lump sum
- Drawdown pension – a flexible income
- Annuity purchase – a guaranteed income for the rest of their life
Death benefits from a money purchase pension could be taxed depending on the age at which you pass away:
- Death before age 75 – benefits are normally paid tax free.
- Death on/after 75th birthday – benefits paid out of the pension are taxed at the recipient's marginal rate of income tax, i.e. the highest rate of tax they pay.
Why is it important to complete a nomination form?
If a nomination form hasn't been completed, the trustees can only pay the benefits to a dependant if there is one. If there is no surviving dependant, benefits can be paid to any individual, but only as a lump sum. While this may not sound bad, if death has occurred after age 75, the lump sum would be taxed at the recipient's marginal rate of income tax, which could be up to 45%. The lump sum would also form part of the individual's estate, which could then be liable for inheritance tax.
It is important to complete a nomination form so that you can inform the trustees of the pension who you would like the death benefits to be paid to. You should add on any individual you would wish to receive any part of the death benefits. This could include children and grandchildren.
The nomination form is not binding on the trustees and they ultimately have the discretion over where death benefits are paid. This is an important distinction that prevents the pension being subject to inheritance tax.
Your wishes may change and so it is important to review your nomination form to ensure it is up to date, just as you would do with a will.
Summary
It is important to check what would happen to your pension on death, as not all money purchase pensions have the full death benefit options. If a pension doesn't have the full options and you would like your beneficiaries to receive your pension in a tax-efficient manner, it may be worth considering moving it to a different pension.
When you plan for your retirement, it's normal to have lots of questions. We're here to help you answer them and provide advice.
Please note: This blog is for general information only and does not constitute advice.
Fabian Taylor is a Chartered Financial Planner and Partner at Page Kirk Financial Services LLP based in Nottingham. He advises on a range of financial matters to aid clients in the planning and arrangement of their financial affairs, including pensions; retirement planning; protection and life assurance; cash flow modelling and inheritance tax. If you would like to contact Fabian to find out how he can help you, simply call 0115 993 6000 or email enquiries@pkfs.co.uk. For more information about Page Kirk Financial Services, visit their website at www.pkfs.co.uk.