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If an individual passes away with no expression of wish, the trustees’ options are limited with how benefits can be paid. Effectively, all of the new pensions flexibility could be lost in this situation.
When there is no expression of wish, trustees can only nominate dependants to receive benefits flexibly, if there are some. Anybody other than a dependant in this instance would need to receive the benefits as a lump sum.
If there are no dependants the trustees do have the option of leaving the benefits flexibly to other individuals.
What impact might this have – case study example
Imagine somebody dies post-age 75 with a fund of a £1 million, with no expression of wish, leaving effectively a spouse and two adult children.
The trustees would have no choice but to offer the funds first to the spouse, i.e. the lump sum or under the flexi-access rules. If taken as a lump sum, clearly she would pay tax at her highest marginal rate losing personal allowances etc. and these monies would then be in her estate for IHT purposes. Taking it flexibly she would simply pay her own rate of income tax and let us assume this is 40%. Therefore for every hundred thousand she withdraws she would be paying £40,000 worth of tax.
Let us also assume her daughter does not earn any income, and her son is a 20% taxpayer. If it had been possible to pass these funds onto the children the daughter would have been able to draw at least up to her personal allowance tax-free paying perhaps only 20% on the excess, depending on the level drawn, and her son would be able to draw any unused threshold between basic rate and higher rate at 20%. This would be a more efficient use of the funds.
However, as the funds are not able to be passed to the children flexibly, the spouse is simply able to withdraw it at 40% passing it on to her children or, effectively pass it on to the children as a lump sum, which in this instance will result in a 45% tax charge.
Not having an expression of wish does not simply have monetary implications, however, it also slows down the process of paying out the benefit. Scheme administrators/trustees need to prove full due diligence has been undertaken to ensure the payments are being paid to the correct person.
Without an expression of wish this process is slowed down and in some instances could force the trustee’s administrator to wait until grant of probate is given for them to feel confident they are paying the benefits to the correct person. In a worst case scenario, in death prior to age 75, if this took longer than two years, it in itself could have tax implications.
The moral of the story is therefore to ensure all of your clients have up to date expression of wishes lodged with their pension’s administrator.
For further information regarding expression of wish nomination forms, please contact your usual financial adviser or alternatively Kerry Houghton on 01772 550614 or via email email@example.com