If you have a private pension, there is an important estate planning point that is easily missed. Many people assume that if their Will says their pension should pass to their spouse or children, that instruction will determine what happens when they die. In most cases, it does not work like that.
Your pension is generally dealt with separately from the assets controlled by your Will, which means an old pension nomination could potentially produce a very different result from the one you intended.
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Topics Discussed:
- Why your pension does not normally pass under your Will and why your nomination form matters.
- What you should review now, particularly with pension Inheritance Tax changes approaching from April 2027.
Your Pension Doesn’t Follow Your Will
Your Will determines what happens to many of the assets forming part of your estate, but your pension is different. Most pension schemes operate on a discretionary basis, which means the pension trustees or provider have discretion over who receives pension death benefits.
When you joined your pension scheme, you may have completed a document known as an expression of wish or nomination of beneficiary form. This tells the pension provider who you would like to receive your pension benefits after your death.
The important point is that putting an instruction about your pension into your Will does not, by itself, legally require the pension provider to follow it. This is why pension planning and Will planning need to work together.
The Form You May Have Forgotten About
Think about when you first started your pension. It may have been ten, twenty or even thirty years ago, and at the time you may have nominated your spouse, your eldest child or somebody else who was important to you.
Since then, life may have changed considerably. You may have married, divorced, remarried, had more children, had grandchildren, entered a new relationship or lost somebody who was previously nominated. If your pension nomination has never been updated, it may no longer reflect what you actually want to happen.
This is where problems can arise. You might have paid for a new professionally drafted Will only a few years ago, carefully setting out how your estate should be divided, while your pension provider is still holding an expression of wishes completed decades earlier.
A Simple Example
Consider somebody with a home worth £700,000, savings of £200,000 and a pension worth £500,000. Their overall wealth is therefore £1.4 million. Their latest Will states that they want everything divided equally between their three children. They may naturally assume that this means each child receives an equal share of the entire £1.4 million.
However, imagine the pension nomination was completed twenty years earlier and names only the eldest child. The £500,000 pension is not simply divided between the three children because the Will says so. The pension provider will consider the pension scheme rules and the nomination it holds when deciding how the benefits should be distributed.
That could result in the eldest child receiving the pension while the remaining estate is divided under the Will. The final outcome could therefore be substantially different from what the deceased believed they had arranged.
What About a Surviving Spouse?
There can also be difficulties where somebody assumes everything will pass first to their husband, wife or civil partner. Your Will may provide for your spouse to inherit your estate, but your pension is still subject to the pension scheme’s own arrangements.
If an old nomination names somebody else, there is a risk that the pension arrangements do not match your current estate planning intentions. This is particularly important where family circumstances have changed.
It is therefore not enough to review the Will without also considering the pension paperwork sitting alongside it.
How to Pass on Your Pension
The first step is to identify every pension you currently hold and check what process each provider uses for pension death benefits. Most providers allow you to complete an expression of wish or nomination of beneficiary form.
Depending upon the scheme, you may be able to nominate one person, several people or even an organisation such as a charity. With a defined contribution pension, beneficiaries may be able to receive a lump sum or, depending on the scheme, leave funds invested and draw an income.
Defined benefit pensions work differently because there is not normally an individual pot of money remaining. The scheme rules determine what benefits may be payable after death. The key point is simple. Do not assume your Will has dealt with your pension. Check the pension itself.
Why April 2027 Makes This More Important
The position becomes particularly important from April 2027. From that point, most unused pension funds and pension death benefits are due to be brought into the estate for Inheritance Tax purposes. However, this does not mean that your pension suddenly becomes controlled by your Will. That distinction is crucial.
Your pension may form part of the calculation when determining the value of your estate for Inheritance Tax, while the pension provider may still determine who receives the pension benefits under the pension scheme arrangements.
This makes joined-up estate planning increasingly important. You need to know what your pension is worth, who is currently nominated, how that fits alongside your Will and what effect the pension could have on your future Inheritance Tax position.
What You Should Do Now
If you have a private pension, there are several straightforward checks worth making. Find out which providers currently hold your pensions and obtain copies of your beneficiary nominations or expressions of wishes.
You should check when they were last updated and consider whether marriage, divorce, children or other family changes mean those nominations are now outdated. It is also important to compare them with what your current Will says.
You should also ensure that the people dealing with your estate know which pension arrangements exist and where the relevant paperwork can be found. These are relatively simple steps, but they can prevent a significant difference between what you intended and what ultimately happens.
Summary
Your pension is one of the most important assets to consider when reviewing your estate, but it cannot normally be dealt with simply by writing instructions into your will. Your pension provider or trustees will operate according to the pension scheme rules and will normally consider the expression of wishes or beneficiary nomination they hold.
If that paperwork is many years old, it may no longer reflect your family circumstances or your current intentions. The position becomes even more important from April 2027 when most unused pension funds and death benefits are due to become part of the estate for Inheritance Tax purposes, despite pensions continuing to operate separately from the Will itself.
Reviewing your will without reviewing your pension nomination could therefore leave an important gap in your estate planning. If you have a pension and would like to make sure your will, pension nominations and wider tax planning work together properly, get in touch with us at Tax Expert for assistance with your Will and estate planning.
Fill out our form here, email us at info@taxexpert.co.uk, or message us on our WhatsApp for out of office hours.
Our partnered Solicitors, Help Me Legal, have a Free Wills Month starting in October, providing an opportunity to review your arrangements and ensure you have an appropriate will in place. For more information, contact Saara at Help Me Legal on wecare@helpmelegal.uk.
Kind regards,
Ilyas Patel
