Over the course of our working lives, many of us find we accumulate a number of pension pots as we move between employers, or as employers change workplace pension schemes. The average UK adult will have 12 jobs during the course of their careers. This can lead to us unwittingly holding a disparate number of pension pots of varying sizes, and oftentimes these get ignored and forgotten about, when they could be better managed to help us meet our long-term retirement objectives.
This has always been something of a common theme, and we encourage our clients to engage with our Wealth Planning team to get a handle on what plans they have in place: to understand their value; whether there are any special guarantees or benefits attached; and whether or not they offer the investment remit, retirement flexibility and inheritability that clients need. We can look too at whether taken together, along with the client’s other assets, they are likely to help secure them the retirements they hope for, and if not, any actions that might help them reach their goals.
Forthcoming changes to pensions in estates to bring added complexity
This common situation of having numerous pension pots dotted around the place is set to become more than ever, an unwieldy administrative burden, not just in the client’s lifetime, but beyond – as the inheritability of pension funds is set to change. From April 2027, unused pension funds will be included in estates for Inheritance Tax (IHT) purposes. Legislation has been included in the Finance Bill which lays out the mechanics of this, and so far, unsurprisingly, it all looks to be fraught with complexity.
The Legal Personal Representatives (LPRs – either the executor of an estate or administrator appointed by a court) of a deceased person’s estate will hold the responsibility of reporting and settling IHT before distributing both pension and non-pension assets.
There are many complicating factors here, including:
- The LPR is responsible for having a grasp on all pension assets included within the estate. They must request valuations for each pension held from each relevant pension scheme administrator and submit the IHT return, but at the same time, they are not responsible for the collection and distribution of pension scheme assets.
- With multiple pensions in play, some of which may be more easily found than others – so depending upon the deceased’s record keeping, the administrative burden may be immense.
- There is an expectation that the LPR must not only source each pension and request values, but also understand whether the pension death benefits are to be paid to an exempt beneficiary, such as a spouse, civil partner or charity, or whether they are to be added to the overall value assessable to IHT. Without this information, the IHT liability for each pension pot and the IHT free estate cannot be calculated. This creates challenges for the LPR who will be expected to quickly get to grips with an awful lot of pension administrative and regulatory know-how to fulfil their duty, and within a strict timeframe too.
- There are a couple of options for the IHT relevant to each pension to be settled: it can be done per pension scheme, or by the LPR – and the resulting rules that accompany this serve also to add complication and potential negative consequences for the beneficiaries. The LPR can direct the scheme administrator to withhold 50% of the death benefit, to meet IHT and any potential penalties and interest. This is freed up once the figures are known, but meanwhile, this can have some serious implications for beneficiaries who might require those funds sooner, for example to provide income.
Typically the IHT bill must be settled within six months from the end of the month in which the individual died. Penalties and interest may be applied where there is failure to do so: HMRC currently charge 8% interest on late payments of IHT. Disorganised pension affairs could therefore prove costly.
One practical way to reduce this risk is through consolidation into a single pension scheme. By taking proactive steps, one can significantly reduce risk of unnecessary tax, penalties and interest, streamline the IHT process, and prevent financial hardship for beneficiaries.
As mentioned at the outset, we at JM Finn have long spoken of the benefits of consolidating pensions to improve investment choice and retirement flexibility. The imminent changes to the inheritability of pensions only adds weight to the argument for simplifying one’s arrangements where appropriate. If you believe you may have numerous pensions which have drifted without review for some time, and would like some assistance, or to understand if you could better organise your affairs, please get in touch with JM Finn’s Wealth Planning team. We are on hand to offer guidance and or advice where required.
The information provided in this article is of a general nature and is not a substitute for specific advice with regard to your own circumstances. You are recommended to obtain specific advice from a qualified professional before you take any action or refrain from action.
