Over the last two months the Technical Support unit has been inundated with enquiries on the thorny issue of nominating beneficiaries. Now nominations are nothing new, members have been able to nominate dependants to receive pension death benefits and beneficiaries to receive a lump sum. So why so much confusion with the flexibility now provided under the new pension freedoms?
The simple answer is different pension providers are giving advisers different views on what can and cannot be done. It is one of these crazy situations where no pension provider is actually wrong, but due to differing scheme rules, administration systems and views on commerciality, some pension providers appear to be less flexible than others.
The one common theme is providers are using a non-binding expression of wish for appointing nominees. This ensures there are no nasty IHT surprises. The key difference is how accommodating should an expression of wish be. I would normally be an advocate for being as amenable as possible as regards most aspects of financial planning, however when it comes to what should be covered in the expression of wish I would actually recommend a degree of caution.
For example one idea being promoted is to nominate a wide range of beneficiaries. This, it is argued, takes away the need to review nominations on a regular basis and leaves any decisions as regards how the pension fund is split until after the member’s death. A scheme administrator is duty bound to consider the needs of dependents of the member and may use its discretion to override any non-binding nominations made. The scheme administrator is also unlikely to wish to get embroiled in family disputes over how the pension fund should be distributed. For example the member may have allocated 98% of his pension fund to his wife with 1% being allocated to each of his two children. He may have included within his expression of wish that should his wife not need access to all her fund any surplus should be used to provide an income for his children. Even if in the children’s view their mother has more than enough income elsewhere and a higher proportion of the funds should come to them, she may not agree.
The best course of action is for the member to review his nominations at least annually and in the interim when there are major changes, such as the birth of a grandchild. Advisers will play a key role here and at the very least should form part of the client’s regular reviews.
Also members and future beneficiaries should be discouraged from drafting their own expression of wishes. Poorly drafted documents may fail to achieve what the member intended or even risk creating an IHT charge.
So the best advice I could give is keep the nomination of beneficiaries as simple as possible and change as appropriate. If the member or beneficiary does not want to use the documentation provided by the pension provider then they should take legal advice.
Keeping to these two basic rules should ensure that nightmare scenarios are avoided in the future.
This blog first appeared on Professional Adviser online