Creating an estate plan is an important step for your clients. It gives them the opportunity to make crucial decisions about who should inherit their wealth when they’re gone. By distributing their estate carefully among their beneficiaries, your clients can ensure that everybody is looked after.

They might also make important choices about funeral arrangements, or who cares for their children when they’re gone. A robust estate plan could even help your clients reduce the Inheritance Tax (IHT) their loved ones pay in the future.

Your clients need to create a will to outline these wishes. They’ll also want to review, and potentially update the document regularly, especially when their circumstances change.

Unfortunately, even well-prepared clients who have an up-to-date will could still be missing an important asset from their estate plan – their pension.

Read on to learn more.

Pensions are not covered by a client’s will

As you know, a will is a legally binding document that leaves instructions about who should inherit from the deceased’s estate. It covers a range of assets and when your client passes away, the executor must administer the estate and pass these assets to the chosen beneficiaries, where possible.

However, a client’s will doesn’t cover their pensions. Instead, they must nominate a beneficiary separately by completing an “expression of wish form”. They may be able to do this online or contact their pension provider directly to request the paperwork.

Bear in mind that, unlike a will, this document is not legally binding and the pension provider makes the final decision about who inherits any remaining funds. That said, they will typically follow the deceased’s wishes, where possible.

The exact process for passing a pension to loved ones depends on the type of scheme your client is enrolled in.

Your clients can normally pass a defined contribution pension to whoever they choose

Your clients may have a defined contribution (DC) pension. They – and potentially their employer if it’s a workplace scheme – will contribute to the pension to build a savings pot. The pension provider invests this fund in the hope that it will grow over time.

When your client retires, they can draw an income from the pot or use some, or all of it, to purchase an annuity – an insurance product that provides a regular income for a set period of time, sometimes the rest of their life. If funds are drawn down outside of an annuity, the onus is on clients to budget effectively so they don’t use up their fund too soon.

If they have a DC pension, your client can normally nominate whoever they like to inherit any remaining funds when they pass away.

Inherited pensions can’t typically be accessed until the normal minimum pension age (NMPA) of 55 (rising to 57 in 2028). After this, the beneficiaries of the pension can decide whether to take a lump sum, draw flexibly from the pot, or purchase an annuity.

If your client previously purchased their own annuity with the pension funds, the payments might stop when they pass away. However, certain types of annuity may continue making payments to a spouse, civil partner, or a named beneficiary.

Defined benefit pensions may have stricter rules about who can inherit pensions

While DC pensions are more common, your clients might be enrolled in a defined benefit (DB) scheme – sometimes called a “final salary” pension. This type of pension provides an income for the rest of your client’s life. After they pass away, certain family members may receive benefits from the pension, but the rules around this will depend on the scheme.

In some cases, the provider may only pay benefits to a spouse or civil partner, or children of the deceased. Normally, the beneficiaries will only receive a percentage of the original payments.

As such, your clients may not have as much flexibility about who inherits their DB pension. Still, it’s important that they contact their pension provider so they can understand what happens when they’re gone and name a beneficiary, if necessary.

Nominating a beneficiary now could prevent inheritance disputes and ensure your clients’ wishes are fulfilled

When your client passes away, their pension provider ultimately makes the final decision about who receives any death benefits.

Unfortunately, if your client doesn’t nominate a beneficiary, their wishes may not be fulfilled. For instance, if a client is in a long-term relationship but isn’t married, their partner might be overlooked. Instead, other family members such as siblings or parents might inherit the pension.

If they are married and haven’t named a beneficiary, a spouse or civil partner will likely inherit their pensions. This might align with their wishes but, in some cases, they may have preferred the funds to go to somebody else, such as a grandchild, instead.

This confusion could lead to disputes among the family if they’re unhappy about who inherited the pension funds.

Fortunately, by nominating a beneficiary ahead of time, your clients can ensure that their wishes are known and prevent any complications for their families.

Get in touch

If your clients need support with their estate plan, we are here to help.

They can contact us at hello@ardentuk.com or call or WhatsApp us on 01904 655 330. As an award-winning financial advice company with advisers included in the 2024 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

The Financial Conduct Authority does not regulate estate planning or will writing.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.