Is your pension your greatest legacy?
Do you leave everything to spouse/civil partner?
It’s common for many clients to nominate the whole pension fund to their spouse when they die; and when I refer to spouse, I also include civil partners. This ensures that the surviving spouse is provided for during the remainder of their retirement.
But there are several issues to consider before choosing this route, and it is important to consider each client’s circumstances. The reasons why a straightforward nomination to spouse only may not be the answer are highlighted below. There are two key areas for consideration: firstly, ensuring that the spouse has sufficient funds, and secondly (thinking of re-marriage), how we might protect the pension fund to keep it within the family blood line. The questions I am frequently asked are: what if my spouse re-marries once he/she inherit my pension fund? Or, will my children from my first marriage be protected?
Can my client afford to skip a generation?
Not every spouse will need the whole of the deceased’s pension fund. If a sustainable retirement income for the survivor can be achieved using just a portion of the deceased’s fund, then they may be comfortable leaving the balance to children or grandchildren on first death.
What about the future destination of inherited funds?
Most clients will trust their spouse to pass any unused funds on their death to their children. But what if there are children from a previous relationship? Or what might happen if their spouse remarries? Passing everything to the spouse means also giving them control over what happens to whatever is left when they die.
Control using bypass trust
I have some clients with more complex family situations, where control over who benefits is deemed essential. In these situations, clients may want to consider bypass trusts, from which the surviving spouse and future generations can benefit. This can ensure that the pension proceeds are kept within the family.
As a Financial Planner, it is becoming more apparent that we need to involve and educate beneficiaries as to how this could work for them, and ensure that they understand the tax implications once they inherit the pension, to avoid unnecessary mistakes. This area is full of intricacies, of which this article barely scrapes the surface – I haven’t covered taxation of pensions benefits, Lifetime Allowance, or any other options here.
So as you can see, there are many considerations and choices to make when planning how you might care for loved ones after your passing. However, with the right open discussion and a good financial plan, any family scenario can be catered for. It is certainly something that my clients very much value discussing sooner rather than later.
