If you have a life insurance policy or a pension, have you nominated who you want to benefit in the event of your death?
This is something that I strongly advise all clients do.
If you don’t have an up-to-date beneficiary nomination form in place, your assets may be distributed in a way that is very different from what you had in mind.
Making a beneficiary nomination puts you in control and gives you certainty over where your money will go.
It can be particularly useful if you have a more complex family situation, such as an ex-partner or children of current and former relationships.
What is a beneficiary nomination form?
A beneficiary nomination form is a document that identifies the person or people that you chose to receive the benefits of a pension or life insurance policy in the event of your death.
It ensures that the trustees or service provider know who to pay the benefits to.
If you have more than one beneficiary, you can decide what percentage of the benefit each would receive.
For example, your partner could receive 50%, and your two children could receive 25% each.
The importance of nominating pension beneficiaries
Benefits in a pension scheme do not form part of your estate.
Therefore, a Will does not necessarily have any impact on how these assets are distributed upon death.
The pension is held by a trustee and the decision as to how that money is distributed will ultimately rest with them if there is no beneficiary nomination in place.
Since 2015, anyone can be nominated as a beneficiary of a pension such as a SIPP (Self Invested Personal Pension).
Previously, the way that benefits were paid and taxed was determined by whether the member was in drawdown and whether the beneficiary was a financial dependent of the member.
Now, if the member were to die before the age of 75, the benefits can be paid to the nominated beneficiary and distributed tax-free.
If the member dies after the age of 75, tax is paid at the recipient’s marginal rate.
This all means that pensions can represent a very effective way of passing on wealth (especially where a spouse is non-domiciled).
However, if you haven’t reviewed your beneficiaries since the rules changed in 2015, you should certainly do so.
The importance of nominating beneficiaries on a life insurance policy
The issue with not having a nominated beneficiary on a life insurance policy is that the proceeds will then pay out into your estate. They would then potentially be subject to inheritance tax at 40%.
The proceeds will also be subject to the probate process and may not be in the hands of your desired beneficiaries for some time.
Some very simple planning can mitigate these issues and result in a smooth and stress-free process.
Does a will override a beneficiary nomination form?
Wills do not override beneficiary designations; rather, beneficiary designations ordinarily take precedence over wills.
Beneficiary nomination pitfalls
A lack of urgency
People taking too long to actually contact their schemes and notify them of their beneficiaries or any changes to their wishes.
Setting and forgetting
Many people will nominate their beneficiaries once, when they first start a pension or take out a life insurance policy and never change those beneficiaries thereafter.
It is not uncommon to see ex-spouses and already deceased relatives still left as the beneficiaries, or grandchildren accidentally omitted when the policy owner or scheme member dies.
I recommend reviewing all of your beneficiary designations regularly, at least every few years, but certainly after you experience a life-changing event, such as a marriage, divorce, birth or death of a loved one.
Forgetting about old employer pension schemes
The beneficiary nominations on these should also be reviewed regularly.
The tendency to choose a different beneficiary for each account
I remember a story of a lady who left her estate equally to her two daughters in her will but named only one daughter as a beneficiary of her various bank and brokerage accounts.
The result: Just about all of her assets passed outside of her estate, and one daughter received much more than the other.
In this case, it would have been better if she had either named both daughters as beneficiaries of each of the accounts—or not named anyone and allowed the assets to flow into her estate, where the assets would have been distributed according to her will.
The Bottom Line
As morbid a subject it may be, organizing your affairs properly is one of the most considerate things that you can do for those that you leave behind.
