Lisa Webster: Death benefit dilemmas

As you will be well aware, from 6 April 2027 HMRC plan to include pensions in the deceased’s estate when it comes to assessing the value for inheritance tax. I’m sure you will have had many conversations with clients on this subject, and some may have already changed strategy when it comes to how they take income. While the plans from the government are not finalised (nor are they likely to be for several months at least), what might be more pressing is to come up with a plan for what happens if death occurs before the changes come into force. For elderly clients, or those in ill-health, who have a significant chance of not seeing 2027, should you be reviewing their nominations? Currently the plan may be to pay 100% to the spouse, then on their death any remaining funds go to the children. This could still be entirely appropriate. Spousal exemption will apply to pensions, and your client may want the spouse to have the entire fund to ensure they are comfortable for the rest of their years. However, if the funds are likely to be in excess of needs for both parties, then it may make sense to update the nomination, so the children get at least some of the funds on first death. If death occurs before 6 April 2027 this means the funds can go to the children without the inheritance tax hit. Once we get to that all important date, if the client is still alive then they may wish to change their nomination back to 100% to spouse. You may also have had clients that have passed away recently, but the death benefits are yet to be distributed. Most SIPP trustees have discretion when it comes to who should benefit from the deceased’s pension. This means they have the ability, if appropriate, to vary the distribution of benefits from the deceased’s nomination. For example, I recently reviewed a case where the deceased was in their 80s with over £1.2 million in their SIPP. The expression of wish was 98% to spouse and 1% each to the two (adult) children. The spouse was also in their 80s. In this scenario you could ask the trustees to consider paying a higher percentage to the children now. As long as the spouse has enough for their needs, this could save a considerable inheritance tax bill down the line for the children should the spouse live past 6 April 2027. This waiting period while the precise rules are uncertain does lead to some dilemmas. Making sure the surviving spouse is adequately provided for should always be a priority, but there could be significant tax savings in passing money on to the next generation where first death occurs before 6 April 2027. Lisa Webster is senior technical consultant at AJ Bell. She is an economics graduate with over 15 years’ experience in financial services. Prior to joining AJ Bell in May 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. She is part of the AJ Bell Technical Team. Email: This email address is being protected from spambots. You need JavaScript enabled to view it. Twitter: @lisasippster

Lisa Webster: Death benefit dilemmas

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