Why you should complete an Expression of Wishes alongside your Will
Last week we shared with you 5 of the reasons why you should write a will (and keep it up to date!). This week, continuing in our Will Aid Month series, we’re sharing some information on the next step – an expression of wishes. What is an expression of wishes, and why should you complete one? Read on to find out.
You may have thought about who you’d like to benefit from your assets when you pass away. You may, therefore, have written a will to ensure your wishes are carried out. However, you may have overlooked what you’d like to happen to your pension.
As you’ll be paying into your pension over your working life, it may be one of the largest assets you own. And yet, it’s easy to forget about it when planning what you’d like to happen to your estate, especially if you’re not drawing an income from it yet. If you have a defined contribution (DC) pension, it’s essential you complete an expression of wishes to ensure your loved ones benefit from your savings.
What’s your pension worth?
According to the Telegraph, after a lifetime of saving, the average UK pension pot stands at £61,897. That’s a significant sum that could have a positive impact if left to loved ones. Depending on your circumstances, your pension value could be much higher than this figure, particularly when you consider investment returns.
It can be difficult to understand how your pension will change over time. During your working life, you are likely to still be making contributions, as well as benefiting from tax relief and employer contributions. As most pensions are invested, investment performance will also mean the value of your pension will rise and fall.
Once you retire, you may begin withdrawing an income from your pension, and it may still be invested. As a result, valuing your pension can be challenging. But looking at how much it’s worth now and how it could change in the future demonstrates why making your pension part of your estate plan is important.
The introduction of auto-enrolment, which means the majority of workers are automatically enrolled into a pension, means more workers than ever will need to consider how they’d like to pass on their pension.
Completing your expression of wishes
While your pension may be an important part of your wealth, it’s not covered by your will. This is why you need to complete an expression of wishes.
An expression of wishes is simply a statement that tells your pension provider who you’d like to receive your pension savings if you die before accessing the money. It’s something that can be difficult to think about, but it can help you make provisions for those who are most important to you if something did happen.
Without an expression of wishes, the pension trustees will make a decision. However, without the expression this decision can be harder to make. And, unfortunately, it may not align with your own choice. It’s important to note that pension trustees may take other factors into account when deciding who receives your pension. This may include whether you have any dependents, but whilst the trustees are not obliged to follow your wishes, they must do their best to accommodate these.
How to complete an expression of wishes
If you haven’t completed an expression of wishes, it’s simple to do. You can usually complete a form within minutes if you have an online account for your pension provider. If you don’t use an online account, your provider should be able to send you the relevant paperwork.
You will need to complete an expression of wishes for each pension you hold. This could be the same person, or someone different. You can name more than one beneficiary for each pension, allowing you to split the sum between your children, for example.
If you’ve changed jobs frequently, you may have several pensions. It’s important you keep track of each and complete an expression of wishes. In some cases, it may make sense to consolidate your pensions to make them easier to manage. If you’d like to discuss this, please get in touch.
How leaving your pension to a loved one could reduce an Inheritance Tax bill
If your estate could be liable for Inheritance Tax (IHT), leaving your pension to loved ones can make sense. The amount of tax paid on an inherited pension depends on the age you pass away and how the beneficiary accesses it. However, it’s usually a lower rate than IHT.
For the 2021/22 tax year, the nil-rate band is £325,000. If the value of your estate is below this amount, your estate will not be liable for IHT.
Many people can also take advantage of the residence nil-rate band. This increases the threshold if you’re leaving your main home to children or grandchildren. For the 2021/22 tax year, the residence nil-rate band is £175,000. In effect, this means most people can leave up to £500,000 before their estate is liable for IHT.
However, the standard IHT rate is 40%. So, if you do exceed these thresholds the tax can significantly reduce what your loved ones receive.
In contrast, a beneficiary is likely to face a much lower rate if they inherit your pension. For example, if you passed away before you turned 75 and the beneficiary took your pension as a lump sum, no tax is usually due. If you passed away after the age of 75, the beneficiary is likely to pay Income Tax at their nominal rate, which may be lower than the IHT rate.
The tax due on inherited pensions can seem complex and will depend on personal circumstances. If you’d like to discuss what it could mean for you or your beneficiaries, we’re here to help. However, if your estate could be liable for IHT and you have other assets to create an income in retirement, it can make sense to leave your pension so that it can be passed on.
Our Thoughts
An expression of your wishes can be just as important as having a will in place. If you are an existing client of ours, we are confident we will have already discussed this matter with you. However, we are always here to talk through any of your concerns and, if there is somebody you feel could benefit from our assistance, please feel free to share our contact details.
Please remember during November that if the potential cost to write a will is of concern, you could benefit from Will Aid Month. Will Aid Month in the UK is an annual event each November where many solicitors waive their fees for wills. Instead of taking a fee, they encourage clients to make a donation to one of nine Will Aid charities. You can read all about Will Aid here, including how to locate a participating solicitor near you.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The Financial Conduct Authority does not regulate estate or tax planning.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
