Beneficiary Nomination
A beneficiary nomination is a crucial step in ensuring your wishes are respected when it comes to the distribution of your pension or life insurance benefits. By nominating beneficiaries, you can ensure your assets are passed on to the right individuals. Completing a beneficiary nomination form provides clarity and helps prevent any misunderstandings or delays after your passing.
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 you choose 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.
Whether you’ve recently become an expat, are in the process of planning to leave the UK, or have been a long term expat and are now preparing to return home, estate planning is essential. Ask yourself: if something happened to you tomorrow, would your spouse or family know where to find your key financial documents?
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.
Beneficiary Nominations
FAQs
A beneficiary nomination is a formal declaration specifying who should receive the benefits from your pension or life insurance policy upon your death. This ensures that the trustees or service providers are aware of your wishes regarding the distribution of these assets.
Nominating beneficiaries provides clarity and control over the distribution of your assets, ensuring they are allocated according to your wishes. Without a nomination, the distribution may be determined by the trustees or default policies, which might not align with your intentions.
Yes, you can nominate multiple beneficiaries and specify the percentage of the benefit each should receive. For example, you might allocate 50% to your partner and 25% to each of your two children.
No, beneficiary nominations typically take precedence over wills. Therefore, it’s crucial to keep your beneficiary nominations up to date to reflect your current wishes.
If you don’t nominate a beneficiary, the distribution of your benefits will be at the discretion of the trustees or according to the default rules of the policy, which may not align with your preferences.
It’s advisable to review and update your beneficiary nominations regularly, especially after significant life events such as marriage, divorce, the birth of a child, or the death of a previously nominated beneficiary.
Generally, pension benefits do not form part of your estate and are not subject to inheritance tax. However, this can depend on specific circumstances and the way benefits are nominated and paid.
Yes, you can nominate any individual or organization, including charities, to receive your pension or life insurance benefits. It’s important to clearly specify your wishes in the beneficiary nomination form.
To nominate a beneficiary, you typically need to complete a beneficiary nomination form provided by your pension or life insurance provider. This form allows you to specify who should receive the benefits and in what proportions.
If your personal circumstances change, such as through marriage, divorce, or the birth of a child, you should promptly update your beneficiary nominations to ensure they reflect your current wishes.
The Bottom Line
As morbid a subject as it may be, organizing your affairs properly is one of the most considerate things you can do for those you leave behind.
