THAT'S POTTY
Pension mistake that could leave your loved ones penniless if you die – how to act NOW
We explain how to ensure you're protecting your loved ones if the worst happens
SAVERS are being urged to check they've taken action to ensure their loved ones are protected if they die.
If you have a pension, any savings you leave behind when you die will be automatically passed to your next of kin - but who this is depends on your circumstances.
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But, you can make sure specific people receive part of your savings by notifying your pension scheme now.
You can't leave your pension savings in your will, as pensions don't form part of your estate.
Instead, you need to fill in a form called an "expression of wishes" stating who you would like to receive your money and how much you want them to get.
This is vital if you are sure you want certain loved ones to benefit from your pension if you die - yet recent research by pension firm Canada Life found almost three quarters (72%) of adults have never filled in an expression of wishes form for their pension.
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While you have some legal responsibilities to leave money to certain people, such as if you have children, your expression of wishes will be taken into account when pension schemes decide who to distribute your cash to.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, explained: "The most important thing to do if you have a pension is to make sure you fill out any nomination/expression of wish forms that enable you to stipulate who you want to get your death benefits when you die."
She added that you may need to update this form if you have a significant change in your life, such as getting married or having children.
"These forms need to be updated every time your circumstances change – ie marriage, divorce, birth of a child so you have the peace of mind to know they will receive something when you die," she said.
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"Not keeping them updated runs the risk that an ex-spouse gets the death benefits at the expense of a more recent partner or that your loved ones face unnecessary delays while the facts are established."
How do I fill out an expression of wishes?
Tell your pension provider you would like to complete an expression of wishes form.
Most pension providers will have a form which will allow you to make an expression of wishes.
According to pension admin firm Curtis Banks, Most will also accept a signed letter from you, as long as it includes all the information they need.
If you have an account with your provider, there may be an option to fill in a form directly, but ask the firm if you're not sure.
There is no limit to how many people you can name as beneficiaries of your pension in your expression of wishes.
You can also update it as often as you like, and it shouldn't cost you anything.
Each time you update it, this will overrule anything you wrote previously - so make sure you're certain you want those changes to be permanent should something happen to you.
What happens with each type of pension?
The way your pension is distributed depends on what type of scheme you're in.
If you have a defined benefit (DB) pension, also known as a final salary pension, your loved ones will receive what are known as "death benefits" from the scheme.
A DB pension is where you are paid a guaranteed income for the rest of your life when you retire, as opposed to building up a pot of money.
Ms Morrissey said: "If you are in a final salary (or DB) scheme, check scheme rules regarding who can be paid death benefits as this can change depending on the scheme.
"A spouse/civil partner can get the benefits, as could a child if they are still in full time education or someone who is financially dependent on you, such as a partner.
"The income paid would be a percentage of what you would have received and would be taxable."
There may also potentially be a lump sum payable to your loved ones, but this depends on the scheme rules.
If you are saving into, or are living on, a defined contribution (DC) pension, which is a pot of money you and your employer save into for your retirement, this will be left for your beneficiaries to use.
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"If you before taking an income from your pension, your beneficiaries may be able to take it as a lump sum, use it to purchase an annuity (a guaranteed income) or take the cash as regular income," Ms Morrissey explained.
"If you die before the age of 75, then this money will be paid out to beneficiaries income tax free, but if you're over 75 then income tax will be paid at the beneficiaries’ marginal income tax rate."
What are the different types of pensions?
WE round-up the main types of pension and how they differ:
- Personal pension or self-invested personal pension (SIPP) - This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- Workplace pension - The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won't be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%. - Final salary pension - This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you'll be paid a set amount each year upon retiring. It's often referred to as a gold-plated pension or a defined benefit (DB) pension. But they're not typically offered by employers anymore.
- New state pension - This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you'll need 35 years of National Insurance contributions to get this. You also need at least ten years' worth to qualify for anything at all.
- Basic state pension - If you reach the state pension age on or before April 2016, you'll get the basic state pension. The full amount is £156.20 per week and you'll need 30 years of National Insurance contributions to get this. If you have the basic state pension you may also get a top-up from what's known as the additional or second state pension. Those who have built up National Insurance contributions under both the basic and new state pensions will get a combination of both schemes.
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