Alan Eccles: Protecting valuable pension benefits hugely important

Paddy McGuinness, right, with a contestant on Take Me Out

Perhaps not the usual source of legal and pensions comment, but Saturday night’s TV programme Take Me Out summarises the rules neatly. Pension members now have the power, in their hands, to nominate who receives certain pension benefits – but that power must be used carefully.

The Taxation of Pensions Act 2014 relaxed rules that ongoing death benefits (as opposed to a lump sum death benefit) could only be paid to a “dependent” (essentially meaning a spouse/civil partner or children under 23). The new rules create new possibilities. Subject to the particular pension scheme and provider, “inheriting” the ongoing benefits of a pension is now open to a potentially endless group of beneficiaries.

As well as dependents, a pension member may now nominate a beneficiary (which could include more than one individual and can include charities) so that those nominated as well as dependents can potentially benefit from an ongoing pension. This can be a very valuable option; the pension will remain intact within a pension ‘wrapper’ and will be inheritance tax-efficient as the pension fund will not, unlike a lump sum payment, then form part of the estate of the individual or individuals benefiting from the pension.

However, there is a need for care as the relaxation of the rules operates in a manner that can easily ‘knock out’ wider discretions that the pension scheme administrator has to benefit someone.

When not managed carefully, the relaxed rules can in fact be restrictive. Essentially, the new rule goes as follows: where there is a dependent or nominee, the pension scheme administrator loses their power to nominate a beneficiary to inherit the pension.

The new liberalising rule must be treated carefully. A nomination by a pension member should, in most cases, seek to retain as much flexibility as possible, as a restrictively-worded nomination can result in the loss of the valuable opportunity of allowing ongoing benefits of the pension to be inherited.

There is a danger that a myth is perpetuated that a pension scheme administrator has an all-encompassing discretion to sort a situation out and pass benefits to a particular individual or individuals.

That is not the case in relation to ongoing pension benefit inheritance where there is a nomination.

There is a lot happening in the world of pensions, and other changes have been mooted, such as lifetime allowance reductions and restrictions on tax relief. These are in general viewed as negatives.

These changes to death benefits are positive, but it is more important than ever to make sure nominations are up-to-date and that they do not fall foul of accidentally excluding potential beneficiaries due to the way the nomination has been completed.

Existing nominations, letters of wishes, or expression of wishes for pensions should be considered afresh and real care should be taken when completing an apparently straightforward pre-printed and non-bespoke nomination. An apparently simple form has now become a very valuable element of estate planning which must not be completed without thought and expertise.

Protecting valuable pension benefits is hugely important and is an area where lawyers, financial advisers and others working together can make a significant difference to how family wealth can be secured, managed and enjoyed.

• Alan Eccles is a partner in the personal & family team of Brodies LLP

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