Private Pension Schemes and Your Will
Pension schemes, even in these uncertain financial times, are an effective method of providing some financial security after retirement. Schemes that involve low-risk investments and steady growth can help to provide sufficient income for the scheme holder and their dependants once their employment ends.
For many people, however, a pension scheme is also a method by which financial security can be provided for the dependants of the pension holder after the latter’s death.
Pensions and the EstateIn the first instance, it should be noted that pensions tend to be treated differently to the rest of an individual’s estate. Pension contributions are normally placed into a trust, of which the pension provider is trustee and contributor is beneficiary.
Trusts of this type are exempt from the process of probate, and similarly will almost certainly be exempt from inheritance tax. This is because, until the assets in the fund are finally transferred from the trust to the pension holder, the legal title does not actually belong to that pension holder. Thus, contributions made before the pension reaches maturity are separate from the estate.
As pre-maturity pension contributions are not part of the individual’s estate, there is frequently no necessity for the pension holder to make provision in their will for the pension to transfer to their spouse or other dependant.
Rather, the terms of the trust will almost certainly ensure that the benefit derived from the assets (that is, the contributions) will pass to the pension holder’s nearest dependant in the event of death before the maturity of the scheme. It is absolutely vital, however, that you check with your individual pension provider in order to ascertain whether or not this is the case for your scheme.
Options on MaturityOnce your pension reaches maturity, however, it may be treated differently. Pension holders are presented with a number of options when their pension reaches maturity, depending on the nature of the individual scheme. Since 2006, pension holders are able to choose an ‘alternative secured pension’, or ASP. This essentially means that you can draw income from the existing fund.
Alternatively, the pension holder can choose to purchase an annuity; this is the traditional choice. ASPs will always suffer from significant inheritance tax liabilities. If you choose to purchase an annuity, however, there will be nothing left to leave in your will; annuities will last only as long as the lifetime of the pension holder, and no longer.
Clearly, therefore, an alternative is desirable if you wish to leave a portion of your pension fund in your will. You will be required to purchase some sort of annuity with a percentage of your pension fund. However, depending on the nature of your agreement, you may be able to draw some of the rest as a lump sum.
This can present a more attractive option if your major concern is to make provisions for your dependants; this lump sum could be placed in a separate trust, ensuring that it is kept separate from your estate and therefore safe from inheritance tax. The assets placed in trust could then be passed onto your dependant upon your death.
As always, important decisions such as these should only ever be made after consultation with an independent financial practitioner.