From April 2027 pension schemes/administrators will have 6 months in which to pay HMRC the IHT due on a pension. That is a highly accelerated timescale on today’s rules, and makes having clients detail their Expression of Wishes even more essential when financial planning, says Caitlin Southall is director of SSAS Transformation and Proposition at WBR Group.
There still seems to be a scarily large proportion of private pension members who do not have an Expression of Wishes (EoW) in place. It’s an important document when it comes to schemes where the administrator or trustee has discretion over where a member’s death benefits are paid. An EoW is an indication from the member as to how their pension should be distributed when they pass. I say indication, because it isn’t an instruction – where there is administrator trustee discretion, it is not a given that the EoW will be followed. It’s important to remember that an EoW isn’t legally binding and sits alongside a Will, although, these should be complementary of each other.
For administrators and trustees, the EoW will always be the starting point when it comes to settling a death claim and it’s always the intention for administrators to distribute based on the EoW (and this mostly is the case). However, in reality it isn’t always this simple. If EoWs aren’t updated or at least reviewed regularly to take into account life events, it might be the case that administrators need to effectively start from scratch to determine how to pay death benefits.
From an administrator/trustee perspective, they’re required to demonstrate a reasonable decision-making process. Some of you may recall the Edge v Pensions Ombudsman case (1999, ECWA Civ 2013), where the following principles were considered by the Ombudsman following a complaint about a Trustee’s discretionary decision:
- Did the Trustee direct itself correctly in law?
- Did the Trustee take into account all relevant but no irrelevant factors?
- Did the Trustee ask itself the correct questions?
- Did the Trustee reach a decision which was not perverse?
Ensuring that an EoW is as detailed and up to date as possible allows the best outcome to be reached by the administrator/trustee.
Under current rules, naming a beneficiary on an Expression of Wish (EoW) influences how pension benefits can be paid. However, beneficiary drawdown is only permitted if the named beneficiary is classed as a dependent under HMRC’s definition. If there are no surviving dependents and no EoW in place at the time of death, drawdown may still be available to other beneficiaries.
Failure to update an EoW to accommodate a change in wishes or situation can result in difficulty when it comes to distributing pension wealth. It can mean that the benefits are paid out contrary to the members’ actual wishes. The reality is that determining the ‘right’ outcome takes time. And time is not a luxury that pensions have, bearing in mind the Government’s plans.
The complication coming down the track is the changes to the way that pensions are dealt with from an inheritance tax (IHT) perspective. Currently, pensions are out of scope for IHT, however from April 2027, most unused pensions will be included in the member’s estate for IHT. Whilst we await the final rules for implementation, this changes the landscape significantly. The proposed timescales require Personal Representatives to pay any IHT liability within six months from the date of the member’s death. Pension Scheme Administrators are required to provide a full valuation of the scheme within four weeks of the notification of death by the Personal Representative. These timescales are extremely challenging, even with a current EoW in place.
The challenges relating to timescales are not new, but it is very much a concern. Currently, pension administrators have two years from the date that they receive notification of a member’s passing, to establish who to pay the pension to, in what proportions, and to physically pay the money out. Whilst this might sound like a long time, when you consider modern family dynamics, it often isn’t sufficient or is run very close to the wire. For those clients with family scattered around the world, or who have divorced and remarried, working through the practicalities of paying a death benefit claim can be difficult and unachievable within two years.
In the lead up to the IHT changes, clients should be considering their overall investment, retirement and inheritance strategies. A regular review of an EoW should be included within this, if it isn’t already. Ad hoc reviews are also recommended if there are life events like death, divorce, birth or marriage as well as family disputes or family fractures. The EoW should be thought of as a living document – one that evolves with life events.
Having a well maintained EoW is likely to make the role of Personal Representative easier. It should minimise the risk of disputes, confusion or delays in paying any death benefits out and incurring interest on any late payments (in accordance with HMRC penalties on late IHT).
Speaking with a financial adviser contact recently, they said that getting people to talk about their death is always a challenge. But as we near such seismic changes around IHT in 2027, it’s essential that clients are talking to their advisers about how to minimise their tax liability, and also to make sure that the structure is in place to best support their loved ones when they pass away.
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