Pension Nominations: The Impact of the October 2024 Budget

Pension Nominations: Estate Planning, Inheritance Tax, and the Impact of the October 2024 Budget.

Pension death benefits play an increasingly important role in estate planning. However, the rules around nominations, tax treatment, and trustee discretion can be complex and are set to become more so following the October 2024 Budget changes. This article outlines key considerations for individuals when dealing with pension nominations and Inheritance Tax (“IHT”).

Do Pension Death Benefits Form Part of the Estate?

In most cases, pension death benefits do not form part of the deceased’s estate for IHT purposes. This is typically the case where the scheme trustees or administrators retain discretion over the payment of benefits. The discretion allows the benefits to be distributed outside the estate, avoiding IHT.

However, where a binding nomination is used and the pension provider is required to follow the member’s instructions, the benefits may form part of the estate unless specific conditions are met.

Binding Nominations

Some pension schemes offer the option of making a binding nomination. This removes trustee discretion and gives members added certainty that the death benefits will be paid as directed. However, to retain IHT protection (at least until April 2027), binding nominations are typically restricted to:

• A Pension Bypass Trust, provided the trust excludes payments to the settlor’s estate; and 
• The member’s spouse or civil partner, although this may still result in the benefits being treated as part of the estate for IHT unless fully covered by the spousal exemption.

Most binding nominations remain revocable, and members can update them by submitting a fresh nomination form.

Reviewing and Changing Nominations

Even a binding nomination can usually be changed at any time by submitting a new form or Letter of Wishes. Trustees and administrators will generally follow the most recent valid nomination on record.

Regularly reviewing nominations is essential, particularly after major life events such as marriage, divorce or the birth of a child. It ensures that pension death benefits reflect the member’s current intentions and reduce the risk of unintended outcomes.

Reviewing at Age 75

Age 75 is a key milestone in pension planning. After this point, death benefits paid from a pension scheme are no longer tax-free, whether taken as a lump sum or drawdown income.

This change has particular relevance where a Pension Bypass Trust has been nominated. In such cases, a 45% tax charge will apply when the lump sum is paid to the trust. 

Making a Nomination

There is no standard method for making a nomination. Most pension providers offer a standard form, but many will also accept a letter clearly setting out the member’s wishes.

The key is clarity. The wording should leave no doubt about who should benefit and in what proportions. This helps the trustees or administrators understand the member’s intentions and reduces the risk of confusion or disputes.

If the member wants their beneficiaries to have the option of income drawdown, it is important to name specific individuals. Nominating a class of beneficiaries, such as “my grandchildren”, or “my nephews”, may not be sufficient to give them this option.

It is also important to note that if a member loses mental capacity, their Attorney(s) under a Lasting Power of Attorney or an Enduring Power of Attorney cannot make or change a nomination on their behalf.

Paying Pension Death Benefits

Unless a binding nomination is in place, pension scheme administrators or trustees will usually have discretion over who receives death benefits. The range of eligible beneficiaries is determined by the scheme rules and often includes:

• Family and friends.
• Lifetime trusts established by the member.
• Trusts created by the member’s Will; and
• Charities.

Individuals may be able to choose between a lump sum and an income (such as income drawdown, an annuity or a scheme pension), but charities and trusts can only receive lump sums.

The Importance of a Nomination

A nomination form or a detailed Letter of Wishes allows a scheme member to guide the administrators or trustees on who should benefit from the pension on death. Although not always binding, most trustees will follow the nomination unless there is a compelling reason not to.

Nominations are particularly important where non-dependants are to benefit. Without a nomination, they may be restricted to lump sum payments and miss out on more tax-efficient income options.

Final Thoughts

The treatment of pension death benefits is technically complex. It is essential to treat pension nominations as part of a broader estate planning strategy. We suggest that you regularly review your nominations, be clear in your instructions, and seek advice where your affairs are complex or where you intend to use structures such as Pension Bypass Trusts.