This became more of an issue with a key change in pension legislation back in 2015 which enabled owners of personal pension contracts and Income Drawdown plans to pass these contracts down to future generations free of IHT.
One of the key questions we get asked by clients is what happens to their money when they die. Basically, people want to know who gets what and when and also, how much does HMRC get (if anything)?
This is when an advice process becomes so important.
We are now not only considering the position of our client but also looking at how their death will affect children and grandchildren or even other family members or friends. And it becomes even more important when a second marriage occurs either through death or divorce.
Carol and Colin had been clients for many years. Colin had a good size personal pension and it was this that was used to provide them with income in retirement. Colin and Carol also had two children.
Sadly, Colin died early on in his retirement and it had been agreed that Carol would receive his Personal Pension, so as to continue to meet her income requirements. The couple had also informally agreed that, upon her death, the money would be passed to their children.
Historically, a specialist Spousal Bypass Trust might have been considered, but after the Pension Legislation changes that came about in April 2015, the new Nominee Drawdown plan was already written under Trust, which would provide Carol with Tax Free Income. Therefore, it didn’t seem to make sense to wrap this money in a different Trust as this would generate Trust Income Taxation.
Five years later, Carol re-married and a new nomination form was submitted with her new husband as the Nominee. At that time, he was informed by Carol that she would like this money to ultimately go to her children and her children were also added to her Nomination Form.
A few years later, Carol then died, and the money was paid to her new husband as her Dependent. And here now lies the problem.
This plan is now owned by her second husband. He has no legal obligation to nominate the children of Carol and Colin, only a moral one. If he wishes to nominate his own children from his own first marriage, he can. Whilst the Trustees of the plan can be approached by the children of Carol and Colin on his death to dispute this and claim that the money is theirs, it will only be paid to them at the Trustees’ discretion.
Therefore, whilst there is the ability to transfer money within a Pension wrapper to a spouse on death or divorce, you can’t dictate where these funds should then then be passed after that. To do this means you can’t use the normal Discretionary Trust Pension wrapper and losing that means losing many other options.
As you can see, what seems like an excellent opportunity to pass money down to future generations can become complicated should any form of ‘jigsaw’ marriage be involved. It’s in these instances that the value of advice becomes clear.
This client discussion is nothing about performance of funds, price of contracts and direct taxation implications, this is all about the emotion of the situation and the personal circumstances of the individuals. For many people, the value of advice is the ability to work with an adviser who understands their circumstances and recognises what is important to them.
Holistic financial advice is not about products and performance, it’s about ensuring that your finances enable you to do all the things you want to do when you want to do them. It’s ensuring that family are protected and you’re able to offer support to further generations not only when you are alive but also on your death.
It’s why the bulk of remuneration for most financial advisers is paid by the client, albeit through the financial products.
It is NOT paid by the Product Provider. Their relationship is with you, the client. A good adviser simply uses financial products to take advantage of certain tax circumstances or to benefit from efficient systems. However, whilst they will analyse the market to find the right proposition for you, their first discussion and only real concern is to you, the client.