Pension planning is one of the most important, but forgotten, areas of estate planning.
When someone thinks about planning for the future to ensure their assets pass to their loved ones, the first thing they consider is ensuring they have a Will in place which is up-to-date and meets their wishes.
However, pensions fall outside of your estate and therefore do not pass via your Will meaning this planning doesn’t provide any structure of your intent for who should receive your pension.
Often, people’s pensions make up a large part of their total estate, but they are left with no nomination form or trust planning, so the pension provider makes the decision at the time of death as to how it is paid out.
Do you really want them to make those important decisions for you? They may not know about your close relationship with your godchild, or the sibling that you don’t get on with and wouldn’t want to receive it.
Even if you do have a nomination form in place, from the moment your spouse, child or other loved one takes a lump sum, that full value sits inside their name at risk of the following threats
If your spouse takes a lump sum
Marriage After Death (MAD):
This risk can affect the family in many ways. For example, say you passed away your spouse was to re-marry soon after when grieving and then realise it wasn’t what they wanted. On divorce, half of the funds could be lost. Alternatively, it may be a situation where the survivor meets someone else some time later and remarries. There would still be the risk that upon second death, their estate would pass to the partner (as the funds are now in their estate, and marriage revokes previous Wills). On the new partner’s own death, it’s likely they would leave it to their own children and it may never reach your children.
Care Home Fees:
If your spouse took funds into their name, and then needed to go into care, the funds would be taken into consideration and assessed for care fees.
Inheritance Tax:
Although the funds are Inheritance Tax free on your own death, if your spouse took funds into their name, they could end up paying Inheritance Tax on the funds when they die.
If your children take a lump sum
Divorce:
If either of your children were to get a divorce further down the line, half or more of the funds you left them could be lost to the ex-partner.
Future:
We all hope our chosen beneficiaries will do the right things and are ready to receive funds but when there are large sums involved however, you may wish to stagger the age at which funds become available, rather than the full amount being available to them at 18.
Bankruptcy or Creditors:
Again, assets taken could be lost if your beneficiaries ever got into financial difficulties. Again not always a common thing but in a world where beneficiaries may run their own business etc. it’s a risk that can simply be protected by the use of the Trusts we will recommend.
Inheritance Tax:
Although the funds are Inheritance Tax free on your own death, again if your children took funds into their name, they could end up paying Inheritance Tax on the funds when they die.