Estate Planning: Lump Sum Pension Death Benefits and Life Policies

Optimising your estate planning involves more than preparing a Will. It’s also essential to consider how death benefits from pensions and life policies are treated. Without the right planning, these assets may not pass in the most tax-efficient or appropriate way to your beneficiaries.

At DTM Legal, we help you make informed choices about how these benefits are structured and managed. Our expert team offers strategic advice to help you maximise the value of these benefits for your loved ones and reduce potential tax exposure.

CONTACT US

Why Pensions and Life Policies Matter in Estate Planning

Lump sum payments from pensions and life insurance policies can form a significant part of your estate. However, they are often not automatically governed by your Will and may fall outside the standard probate process.

Key considerations include:

• Death-in-service benefits from employment
• Personal or occupational pensions with lump sum death benefits
• Life insurance policies, including those written in trust

Getting the structure right ensures these benefits are passed on quickly, efficiently, and in line with your intentions.

The Role of a Solicitor in Pension and Life Policy Estate Planning

Our team provides tailored legal advice to ensure your arrangements for pensions and life policies complement your wider estate plan. We can assist with:

• Nominating or updating beneficiaries: Helping ensure your wishes are clearly recorded with pension providers and policyholders.
• Advising on discretionary trusts: Reviewing whether benefits should be placed into trust to offer flexibility and reduce IHT exposure.
• Reviewing existing arrangements: Ensuring existing nominations and trust structures still align with your current wishes and family circumstances.
• Drafting trust documentation: Setting up appropriate trusts to receive lump sum benefits outside your estate.
• Working alongside financial advisers and pension administrators: Coordinating a joined-up approach for maximum efficiency and clarity.

By taking these steps, we help you secure peace of mind that your loved ones will benefit as intended, without unnecessary delays or tax liabilities.

Frequently Asked Questions

Do lump sum pension death benefits form part of my estate?

Many death benefits are held in a discretionary trust with the provider.  However, currently whether they pay out to your beneficiaries outside of your estate depends on whether you have completed a nomination form and whether this has been updated and if your intended beneficiaries survive you.  If the benefits pass in this way, currently they fall outside of your estate for inheritance tax purposes.  However, may increase your beneficiary’s estate for inheritance tax.

If you do not have an up to date nomination form or surviving beneficiaries on your nomination form, it is likely that the death benefit will fall into your estate and be subject to inheritance tax.

The Autumn Budget October 2024 proposed changes to the pension legislation and from April 2027 the government intend for such benefits to be subject to inheritance tax on most pension death benefits (subject to exceptions for example, if the benefits pass to a spouse or Civil Partner).  The legislation is currently still in consultation.

Can I leave my pension or life policy to anyone?

Yes, but each provider will have different rules. It’s vital to keep nomination forms up to date and consider any legal or tax implications.

What happens if I haven’t nominated a beneficiary?

If no nomination exists, the pension scheme trustees are likely to pay the benefit to the estate to be distributed in accordance with the Will or intestacy rules.

Is there a benefit to putting a life policy in trust?

Yes, it usually means the proceeds can be paid out quickly and won’t be counted as part of your estate for Inheritance Tax purposes.  However, only whole of life policies can generally be written into Trust.

How often should I review my nominations and trusts?

You should review these whenever your personal circumstances change such as marriage, death, divorce, children, or a change in financial situation.

Considerations Before Speaking to a Solicitor

Before your consultation, you may find it helpful to think about the following points. This will help us provide focused and relevant advice:

• Have you completed up-to-date nomination forms with your pension provider or life insurer?
  These forms are vital for ensuring the correct person receives the benefits. We can review existing nominations for accuracy and relevance.
• Do you know who you would like to benefit from these policies?
  Having clarity on your chosen beneficiaries helps us advise whether your current arrangements meet your intentions.
• Have you considered using a trust to receive the benefit?
  Trusts can offer flexibility, and tax advantages. We’ll discuss whether this is a suitable option for your circumstances.
• Are you aware of the potential Inheritance Tax implications?
  Lump sum benefits may be exempt but not always. We can assess how your current arrangements impact your overall estate and suggest improvements if needed.
• Do your existing arrangements align with your wider estate plan?
  Coordination is key. We’ll ensure your Will, trusts, and beneficiary nominations work together to protect your family’s future.

Speak with a Trusts and Estates Solicitor: Lump Sum Pension Death Benefits and Life Policies

For expert legal advice on planning for lump sum death benefits and life insurance policies, speak to our specialist team today. Contact Heather Lally, Partner in our Trusts and Estates team, by calling 01244 354822 or via email at heather.lally@dtmlegal.com to arrange a confidential consultation.