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Issue flagged with expression of wishes and death benefits in drawdown

20 May 2018

The rules surrounding death benefits in drawdown could leave beneficiaries confused and unable to access drawdown, Curtis Banks Group has warned.

Since the introduction of the pension freedoms three years ago, drawdown has grown in popularity. However, should the pension holder die before the age of 75 whilst in drawdown, the current rules allow an individual’s pension to be inherited by a nominated beneficiary or beneficiaries who can take the pension, either in part or in full, as a lump sum tax-free. They have the option to leave the full pension, or part of the pension, and continue to take income from drawdown.

However, if the pension holder dies after the age of 75, beneficiaries are liable for tax. If the beneficiary takes the pension in full or in part, or whether they choose to take income from the drawdown arrangement, they will be charged at their marginal tax rate.

Expressions of wishes play a key role in making sure drawdown is available for beneficiaries, however Curtis Banks warned that problems could arise if a different beneficiary is chosen. According to the group, there remains confusion around how this works in practice and what might happen in unforeseen circumstances.

During its ‘SIPPs for Modern Retirement’ roadshow, Curtis Banks gave advisers fictional scenarios along with expressions of wishes forms and asked them to identify which forms would allow the chosen beneficiaries in each case to have the option of drawdown. On average, just over one in three (36%) gave the correct answer in each scenario.

Pension technical manager Jessica List said: “The exercise intentionally used complex scenarios and we went through the examples very quickly, so these results won’t represent advisers’ true understanding of the rules. However, it does show that there is still some confusion over how the rules work in practice and was intended to highlight to advisers that even up-to-date expressions of wishes can still fall down in the face of unexpected situations.

“If, for example, one of the chosen beneficiaries has also died or decides to turn down their share of the benefits, another beneficiary chosen by the scheme administrator may not be able to have drawdown. Keeping an expression of wishes up to date is important but isn’t always enough in isolation – the investor also needs to make sure that it caters for unforeseen circumstances.”

List said there were three key steps investors and advisers could take to help alleviate potential issues.

“Firstly, check that there is an expression of wishes in place. A surprising number of people put off making a nomination up front and then simply never get around to it.

“Secondly, check that the expression of wishes is up to date. Most often, problems arise because the expression of wishes on file is years old and the investor’s situation has changed.

“Finally, check that the expression of wishes caters for unforeseen circumstances. Make sure that, should the worst happen, the expression of wishes will still leave options open for the beneficiaries.”