Expression of Wish v Nominated Beneficiary

wary

I note that my wife’s NEST pension has the option to “Make an expression of wish” or to “Make a nomination”.  It seems that the former will usually ensure that it will not be subject to inheritance tax whereas with the latter, it usually will be.  Also, the eventual beneficiary when making an expression of wish is somewhat down to NEST’s discretion.

Is it usual to have a choice of either on a pension pot?  I don’t ever recall being given this choice on my various pension policies & SIPPs by my various IFAs over the years.  (I’m pretty sure I’ve just been asked to nominate a beneficiary.)

For my wife’s NEST, the expression of wish would appear to be more tax efficient.  But is there any downside to either option that we should be aware of?  For example, suppose she leaves it 100% to me, but I die before her and she doesn’t update it accordingly? … or indeed if we get wiped out together (Romeo & Juliet style or otherwise)?

Thanks

dunstonh

 It seems that the former will usually ensure that it will not be subject to inheritance tax whereas with the latter, it usually will be. 

It can mean that but also some providers use both terms interchangeably.  So, you need to be on guard.   I don't know what Nest do.

Is it usual to have a choice of either on a pension pot? 

Nowadays, it can be.

 I don’t ever recall being given this choice on my various pension policies & SIPPs by my various IFAs over the years.  (I’m pretty sure I’ve just been asked to nominate a beneficiary.)

Its a more modern option.   

 For example, suppose she leaves it 100% to me, but I die before her and she doesn’t update it accordingly? 

The trustees will look at the situation at point of death.  A lot of providers nowadays allow written instructions detailing succession and what ifs.

Albermarle

Also, the eventual beneficiary when making an expression of wish is somewhat down to NEST’s discretion.

That is the case with all pensions, not just Nest . The pension is not legally yours , it is held in trust by the Trustees, which is why it is not included in your estate and therefore not subject to IHT.

However it is rare for the Trustees not to follow the expression of wish , only in special cases .

p00hsticks

wary said:

It seems that the former will usually ensure that it will not be subject to inheritance tax whereas with the latter, it usually will be. 

More accurately, the former means that it falls outsode the deceased estate, whilst the latter means it falls inside the estate. The estate may or may not be liable for inheritance tax depending on it's size. 

wary said:

  For example, suppose she leaves it 100% to me, but I die before her and she doesn’t update it accordingly? … or indeed if we get wiped out together (Romeo & Juliet style or otherwise)?

I'm not sure what would happen in the event of a nomination, but if the pension trustees have discretion then in my experience they will look at/speak to surviving next of kin (spouse, children, parents and siblings in that order) and the contents of the deceased's will and make a judgement call - the same is also what I've experienced with a death in service payment.

jamesd

If a pension is opened within two years of death it's not necessarily outside the estate for inheritance tax. In this situation it's useful to nominate the spouse as the recipient since their inheritance is free from inheritance tax.

Marcon

jamesd said:

If a pension is opened within two years of death it's not outside the estate for inheritance tax. In this situation it's useful to nominate the spouse as the recipient since their inheritance is free from inheritance tax.

I wonder if you're thinking of transferring benefits to a personal pension arrangement when in ill health, rather than simply starting a pension (and even then, it's not automatic - see https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/iht-pensions/)?

I'm not aware of any rule which says pensions started within 2 years of death are subject to IHT, but happy to learn if you'd kindly provide a link to the relevant legislation.

jamesd

The page you linked to has an extensive discussion of the transfer of value out of the estate issue that arises if it can be argued that the person acted in anticipation of dying within two years of death.. 

I've tweaked my post a little to cover the issue.

Marcon

jamesd said:

The page you linked to has an extensive discussion of the transfer of value out of the estate issue that arises if it can be argued that the person acted in anticipation of dying within two years of death.. 

I've tweaked my post a little to cover the issue.

Your post still suggests (particularly to novice readers, of which there are many on this site) that a 'new' pension opened within two years of death could be subject to IHT. I don't think that's the case - as you say, the link the I gave explains when a transfer might be caught. 

jamesd

The first of the key points at the top of the article says:

"Contributions to a pension scheme can be a lifetime transfer of value if the member is in ill health or the contributions are made to someone else’s pension."

One thing contributions aren't is transfers and your assertion that a new pension (receiving no pension transfer money) can't be subject to IHT is wrong, as explained at your link.

The transfer of value it refers to is a depletion of the value of the estate by transferring assets out of it. New contributions to pension schemes can be transfers of value out of an estate because they reduce the amount of money inside it and can thereby decrease the amount of inheritance tax due.

For convenience of others who want to read about this interesting aspect of planning a working version of your link is https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/iht-pensions/ 

wary

Thanks all for the responses & info provided, which are appreciated.  

IIUC, it seems that an expression of wish is preferable as the pot is less likely to incur inheritance tax, and in the case of both of our deaths, it would likely go to our children.

However, is there any downside to choosing this option compared to the other option (make a nomination) that I should be aware of?  Thanks.

jamesd

The recent link explains in great detail but in general it's preferable to make an expression of wishes. That allows the trustees flexibility in dealing with changed circumstances though if time allows you should update the wishes.

Don't rely on likely. Be explicit that this is your preference in that situation. Else you both may be hit by a bus, you dying two days before your spouse with the trustees having to sort out where her money goes because you left it to her in the expression of wishes. It isn't like a will and inheritance where in that situation your will is first applied then hers because the trustees do get discretion. But try to help them to do what you want.

The issues when nomination are better essentially relate to what someone in known ill health does within two years of death though there are plenty of nuances. If you do find yourself in ill health and making substantial pension moves or changes, ask for help.