There is a lack of control in death benefit nominations advisers may not be aware of which could come back to haunt them, James Hay has warned.
Head of technical support Neil MacGillivray said advisers could face problems down the line when the beneficiaries of former clients receive a different inheritance than they expected or had planned for.
Where control over the assets is a priority, putting the money in a bypass trust may be a better option, he said.
In particular, MacGillivray (pictured) pointed to two problems - when a person wants to pass on a pension fund to someone in particular and when they want to pass on their pension to their children.
He explained nominations leave the dependant or nominated person in charge of the pension fund, which means they can pass it on to whoever they want.
For instance, a spouse may pass on an inheritance to their new family instead of the children of the deceased, as originally planned. This could create problems when the would-be beneficiaries expected the adviser to have put a plan in place for them.
A further issue is the passing on of pensions in drawdown. The law does not allow a person to be a dependant and nominee at the same time.
23 is the magic number
Dependants are those deemed to be financially dependent on the deceased, including the spouse and children until the age of 23. Nominees, on the other hand, could be anyone appointed by the person before their death.
The problem occurs when children reach the age of 23 as that is when they cease to be classed ‘dependants', MacGillivray said.
Because they cease to be a dependant they are no longer entitled to drawdown though they may be able to receive any funds remaining as a lump sum.
The problem is particularly pertinent where there are two children, one over and one under the age of 23.
In such a scenario the older child can keep the pension whereas the younger one will have to withdraw it once they are 23, which could have tax implications for them.
"HMRC are aware of the problem and they could rectify it but they don't seem to want to," MacGillivray said.
He added: "Nominations are very limited when it comes to control. It's quite clear advisers are trying to do too much in nominations they are not designed to do.
"It's a small detail people aren't aware of but it's going to cause a lot of problems in the future as advisers will not have covered these points."
