Andy Zanelli looks at the issues surrounding death benefits
Some of the recent changes in pension legislation have made me step back from the immediate effects for clients and think about an issue that quite often gets overlooked. The issue I am referring to is ‘death benefits' and a number of things spring to mind. One of the most used quotes is the classic from Benjamin Franklin that the two things you can be certain of are: ‘death and taxes'. In the current economic climate and drive for austerity by governments, some might say: ‘death BY taxes'.
Another event that brought the scale of the issue home to me was drafting a new will and trust planning for my teenage children should anything happen to my wife and I. Not only did I see in stark black and white figures the ‘disconnect' between my relative wealth when alive and healthy compared to a sombre truth for many of the population - I was worth vastly more dead than alive. There was then a lively, and at times heated, discussion between my wife and I when I outlined my plan to put my pension death benefits in trust. I have also been ‘offered' the opportunity to act as executor and subsequently trustee on the death of one of my siblings. The first thing I did was draft my letter of resignation as a trustee! Why? Well, this brings me to my main point and link to the title of this article. I cannot imagine a more volatile cocktail than death, money and family!
What are you worth?
The reality for many clients is the one outlined above. The assets available when they die are significantly more than those available while they are alive and one of the main constituents of this will be the benefits paid from pension schemes. As with all aspects of pensions these days, the area of death benefits; how they are paid; how they are potentially taxed; the form they take and who decides on the recipient, is ever more complex. Take the cocktail of emotions at a difficult time, mix in the complexity and there are a number of questions that could be asked:
• They are the client's death benefits so why not try and control their destination and allow the client to express their wishes clearly, thereby removing some of the emotion?
• Does the client want to structure how and where the benefits are paid as tax efficiently as possible, both at death and into the future?
• Does the client want to protect their children and/or spouse from potential ‘second marriage' complications?
• Is the client aware of the death benefit options available from their pension provider in respect of different pension benefits? This can include: expression of wish; allocation to dependant; integrated trust; capital protection; fixed payment period and trustees discretion
• Is the client aware of the default position for the trustees of the pension scheme and how robustly they fulfil this role if required?
• Has the client reviewed their position recently, not only due to the time elapsed since the last review, but critically because of the increased complexity due to legislative changes?
Why would a client leave these very personal decisions to trustees of a pension scheme that they have never met and will have no idea of the family dynamics, when they could exercise a level of control and engage trustees of their own choosing? The conclusion I have drawn, from both my own experiences and the type of question above, is that they would not!
As a simple starting exercise why would you not route your pension death benefits through a trust arrangement that you have set up, chosen the trustees and left a letter outlining your wishes? In most cases this is a simple, low cost exercise. Even if the intention is that the spouse is to receive the whole amount; time and circumstances change and this exercise should provide some breathing space at an emotional time. When the dust has settled a more rational decision can be made in the context of the family circumstances and the tax environment.
The whole area of pensions has become more complex and death benefits have not been immune from these changes. When dealing with one of the largest potential assets at death and the volatility that death, money and family can produce, it makes sense to ensure that clients choose the correct ingredients for their cocktail and not get handed one that leaves a sour taste in the mouth.
Andy Zanelli is head of techinal sales at AXA Wealth
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