Technical Focus: Expression of Wishes

Technical Focus: Expression of Wishes

Given high house prices and the frozen Inheritance Tax (IHT) thresholds, more people than ever will settle IHT charges. It is therefore crucial to encourage careful tax planning and consider all assets when doing so, to prevent falling foul of IHT where this could be otherwise avoided. Whilst pensions are generally outside of an estate from an IHT perspective, they should form part of a client’s wider estate planning. In order to do this, it is vital to create an expression of wishes (EOW) and also to regularly review it. Events such as marriage, divorce, or family births and deaths, could all trigger changes to a client’s estate planning, so regularly reviewing their expression of wishes is critical.

An EOW provides details of who the client would like to receive any remaining pension assets upon their death. The client can specify one or more beneficiaries, including a trust or charity, and define the proportions in which the assets will be distributed. While an EOW is not legally binding and the final discretion lies with the pension trustees as to how the assets are distributed, it serves as the strongest indicator of the client’s desired distribution of their pension, emphasising the importance of keeping it up to date.

A beneficiary has several options available to receive the death benefits. They could choose to withdraw all the funds from the pension as a lump sum, draw the benefits from the pension through beneficiary’s drawdown, purchase an annuity to provide a guaranteed income or opt for a combination of these options. It is important to note that the specific options available and their tax implications can vary depending on factors such as the SIPP provider, the member’s age at the time of death, and the beneficiary’s relationship to the deceased member.

Unlike assets distributed via a will, which form part of the deceased’s estate and are usually subject to Inheritance Tax, pension assets can be passed on to a beneficiary free from inheritance tax. This is because the assets held within a pension generally do not form part of an individual’s estate for IHT purposes.

Although a pension allows the client to directly nominate a beneficiary, it is still essential to have an up-to-date will in place to ensure assets not linked to the pension are distributed as intended. Additionally, it is important to ensure that the will does not contradict the EOW to avoid potential unintended complications.

In cases where a contradiction between an EOW and a will arises, it would be up to the pension trustees to establish the client’s intentions. Whilst providers will in the first instance look to distribute assets in line with the client’s EOW, where there is a contradiction, it does open up the possibility that their decision may not align with what the client had intended.

Considering that a pension generally falls outside of an estate for IHT purposes, it is worth considering both an EOW and a will when conducting future tax planning. A pension can provide a highly tax-efficient environment, especially for legacy planning. By ensuring that a client’s EOW is up to date, it helps ensure that trustees have the necessary information when distributing pension assets to ensure that the assets are distributed as the client had intended.