Jessica List: Four questions to ask your provider about death benefits flexibility

Jessica List asks, and answers, four questions to ask pension providers about death benefits flexibility

The death benefits rules for defined contribution pensions offer scope for a lot of creativity when it comes to planning how to pass any remaining benefits to a client’s beneficiaries.

However, sometimes a client’s plans could face problems with their providers’ rules or restrictions, rather than the legislation itself. Below we offer four suggestions for questions to ask providers to make sure they can offer the flexibility your clients require.

1) Are there any age restrictions for beneficiaries’ drawdown?

It’s not too unusual to find pension providers that don’t open new plans for clients who have already turned 75. Sometimes this is a legacy issue (after all, it’s not that long in the grand scheme of things since individuals had to crystallise benefits by age 75), or related to the fact that the provider in question would not accept contributions from someone over age 75. However, sometimes due to system restrictions or the provider’s own preference, this restriction also means that beneficiaries over age 75 are unable to open a beneficiaries’ drawdown account.

Unless it’s a case where the system makes it a literal impossibility, it might be worth checking if the provider would be willing to open the drawdown account on the understanding that the beneficiary would immediately transfer to a new provider.

2) Is beneficiaries’ drawdown available if the beneficiary lives overseas?

Similar to question one, this is often to do with restrictions that providers have in place for their ‘normal’ pensions and clients, which then extend across to beneficiaries. It may also be worth checking whether there are any differences if a beneficiary lives overseas – for example, whether there are additional charges for making income payments.

Tax can be trickier when beneficiaries live overseas; although it’s worth noting that this can also be true of normal pension clients. Providers will normally follow the same process of deducting tax according to the instructions given to them by HMRC, and beneficiaries would normally need to discuss any issues with HMRC directly.

3) Can you request specific assets or monetary amounts to go to beneficiaries?

Most expression of wishes forms will ask the client to confirm the percentage of the pension they would like each beneficiary to receive, and this method works for the majority of cases. However, sometimes clients may wish to leave a monetary amount to a specific beneficiary, or a specific asset such as a commercial property. It’s important to check providers can accommodate this – particularly in the case of assets, as sometimes providers may require everything from the deceased’s pension to be sold before paying cash death benefits.

While it’s always important to regularly review and update expressions of wishes, it’s worth noting that this can be particularly true of ones giving monetary amounts or specific assets to beneficiaries. For example, if the asset in question is sold, or the pension value can no longer support the monetary amount, the expression of wishes may need to be changed. Clients could consider making an alternative expression of wishes in the event that such a situation arises unexpectedly on their death.

4) Can beneficiaries transfer in or contribute other funds?

Beneficiaries’ drawdown funds can be transferred between providers and/or held alongside other pension benefits, as long as they are kept in their own separate arrangement. However, pension providers will all have their own ways of administering beneficiaries’ drawdown, which can affect the options the beneficiary has in terms of transferring or contributing other pension benefits.

For example, some providers may set up a dedicated plan or account purely to hold the beneficiaries’ drawdown funds, and which isn’t capable of holding other pension benefits. Others may effectively set up one of their normal pensions for the beneficiary, where it initially only holds the beneficiaries’ drawdown arrangement, but is also capable of receiving other transfers (either of other inherited funds, or the beneficiary’s own pension benefits) or contributions. Some providers may be able to accept transfers of other beneficiaries’ drawdown arrangements, but can’t hold a mix of the beneficiary’s own and inherited pensions in the same account.

For some beneficiaries, this might not amount to much more than a factor in deciding where to consolidate their pensions or the difference of an additional annual fee. For others though, it could be more significant.

For example, if there are liquidity issues in a pension holding a commercial property, it’s not uncommon for clients to consider making a contribution or transferring some funds from a different pension to help alleviate the problem. However, if a beneficiary is in this position in a pension where there’s no option to transfer or contribute funds, this could create a bigger problem.

Some of these issues would become apparent when a client completed their expression of wishes, which would at least give time to adjust plans or make alternative arrangements if necessary, although could still prove quite a headache to resolve.

However, some would not necessarily come to light until it came to paying the death benefits, at which point it could be too late to save the client’s carefully laid plans. It’s always worth checking in advance to help make sure your providers can be flexible enough to accommodate your clients’ plans.

Jessica List is pension technical manager at Curtis Banks