What Happens If You Die Before Retirement?
At the risk of sounding morbid, there’s a chance that you might die before reaching retirement age. Data from the Office for National Statistics (ONS) puts it at 9.6% for men aged 40 and 5.2% for women aged 40.
So, a small chance…but not as small as you’d like. If you have a will in place, well done – but sadly this won’t cover your pension.
Instead, you’ll need an expression of wish form (also known as a nomination of beneficiary form) to be sure that your loved ones benefit from your pension in the way that you intend.
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Why Don’t Wills Cover Pensions?
Many people are surprised that wills don’t include pensions but there are four main reasons why not:
Separate Legal Entity: The Trust-Based Nature of Pensions
Most pensions operate under a trust-based structure. The pension scheme’s assets are legally owned by its trustees – not by the individual member. This means the benefits from the pension scheme are paid out at the trustees’ discretion, not directly from the individual’s estate.
Avoidance Of Probate
Including pension benefits in a will would subject them to the probate process, which can be lengthy and complicated. By keeping pensions outside the will, the benefits can be paid directly to the beneficiaries – without the delays associated with probate.
Tax Efficiency
Pension benefits paid outside the will can be more tax-efficient. For instance, if the pension scheme member dies before the age of 75, the beneficiaries typically receive the pension benefits free of income tax. If pensions were included in the will, they could be subject to Inheritance Tax (which is not usually the case when benefits are distributed at the discretion of the pension trustees).
If you don’t complete an expression of wish, any pension entitlement could be paid to your personal representatives (the executors of your will). This means that the payment could form part of your estate and be subject to Inheritance Tax if the value of your estate were to exceed HM Revenue & Customs thresholds.
Trustee Discretion
Pension schemes are designed to allow trustees discretion over the distribution of death benefits. This discretion ensures that the benefits can be paid to the individuals the trustees believe to be the most appropriate beneficiaries, based on the expression of wish form and other relevant factors. This discretionary power also helps protect the benefits from creditors or legal claims against the estate.
Why An Expression Of Wish Form Is So Important
An expression of wish form is crucial for ensuring that the benefits of your pension scheme are distributed according to your wishes if you die.
Without this form, the scheme trustees will decide who receives your pension benefits – and that might not align with your wishes.
The laws governing expression of wish forms are:
- The Pensions Act 2004: This introduced a framework for regulating pension schemes in the UK. The aim was to ensure they were managed properly and that member benefits were protected.
- The Pension Schemes Act 1993: This covers various aspects of occupational and personal pension schemes, including member benefits and protections.
- Trustee Discretion: The trustees’ discretion in paying death benefits is typically guided by the trust deed and the rules of the specific pension scheme.
How A Lawyer Can Help You
Your circumstances change in life, and so might your wishes regarding your pension benefits.
A solicitor can remind you to update your expression of wish form and can help with the process. This is particularly important in the event of separation, divorce or dissolution of a civil partnership – or if your intended beneficiary dies before you do.
Contact Coles Miller Partner Lindsey Arnold for expert legal advice. She is a highly experienced family lawyer and is accredited as a specialist in complex financial remedy and children matters.
Lindsey often deals with complex cases – including ones that have attracted media interest. Her specialisms include cases involving human rights and the planned or unlawful movement of children from the country (Hague Convention cases).
Expression of wish forms should form part of a holistic strategy that includes making a will, Inheritance Tax planning and lasting powers of attorney. You may also wish to consider care home funding, equity release or trusts. For specialist advice on these matters, contact Coles Miller’s Wills & Probate Department.
