Technical

And the nomination goes to... Keeping drawdown tax-efficient across the generations

Alastair Black

Alastair Black, Head of Financial Planning at Standard Life, explains why nominations are so important to clients when it comes to benefiting from the tax efficiencies that came in with pension freedoms.

Taking advantage of pension freedoms.

When pension reforms came in, they introduced unprecedented freedom and choice. And whilst being able to take a tax-efficient drawdown from a pension was one of the headline benefits, this was of course not actually new - it was always possible through Flexible Drawdown. What I'm considering today is equally important, and arguably something which has caught the imagination even more - the ability for a client to pass the pension itself on, tax-efficiently. To make the most of this, it's important to keep three things in mind.

  1. Being with the right product
  2. At the right time
  3. With the right nomination

Now, from the client's perspective, the first two points may seem obvious and important - and of course, they are. But from numerous discussions with our adviser partners, I would suggest that many clients don't really understand the relevance of the third point - having the right nominations. As an adviser then, how best might you explain the importance of this - to help make sure the client keeps their nominations up to date?

Having the right nominations.

Back to basics, then - there are two main benefits of taking a drawdown option with a pension. It can grow tax-efficiently. And it can also stay in the pension wrapper and be inherited tax-free. This is what's commonly known as "cascading wealth".

But in order to pass on that wealth in a tax-efficient way, the pension holder needs to "nominate" whoever they want to inherit the money. Nominations can apply to whomever your client wishes- they can be for one or more people, a spouse and / or children or grandchildren, a charity, or any other organisation that matters to them.

As with any investment the value of your investment can go up or down and may be worth less than what was paid in.

Let's imagine your pension-holding client has become a new grandparent. Congratulations, that's lovely. But in the excitement of welcoming a family member, it’s easy to overlook the legal niceties that could ensure a secure financial future for the new arrival. To benefit from tax-efficient drawdown when the time comes, the new grandchild would need to have been nominated (and by name – not under a generic “grandchildren”). If they aren’t nominated, they can get a cash lump sum if the Trustees think that’s the original intent - but they can’t keep it in a tax-efficient pension. And, in less happy circumstances, clients may need to be prompted to remove nominations in the case of family relationship breakdown.

Let’s not underestimate the importance to your business here. Nomination maintenance means that as an adviser, you have an additional opportunity to keep in touch with clients on a regular basis. In time, you might even be able to forge a relationship with the dependants who are nominated. Beneficiaries can in turn nominate successors, and in this way wealth can be passed down the generations, tax-efficiently.

Nominations – the details

Let’s look at a quick reminder of how nominations work. Strangely, the money doesn’t have to go to the named person. It’s called a nomination because it’s who your client would like the money to go to. (It could have tax consequences if it had to go to an individual.)

Having said that, it’s very unusual for the trustees of a scheme not to follow the nomination. It is only thing the trustees have to help them in understanding the deceased’s wishes. And if the trustees did decide to give some of the wealth to someone not nominated, they’ll only be able to have the money as an annuity or cash lump sum. It’s only beneficiaries who are nominated who can take the money as a tax-efficient drawdown.

When is the right time?

When is the right time to have a pension – and have the nominations in place? Everybody should do this as early as they reasonably can; nobody knows when it may be needed. And of course it can be amended at any time. At the latest, this is something that clients should start thinking about when they’re in their 50’s and 60’s.

Making sure the pension’s right.

Then there’s the question of the right pension. That’s because not all pensions allow drawdown. For example, old legacy pensions are often closed-books – and don’t offer the drawdown option. We can help with that bit - Standard Life pensions have offered drawdown for a number of years. But, as it’s not always the case, it’s important for advisers to keep an eye of the kind of pensions that their clients have, and make sure those nominations are up to date.

Summary take-out

Having the right pension at the right time is always going to be important.It’s keeping the nominations up to date that’s often overlooked by many clients. This in itself is a great opportunity for advisers to strengthen their relationship with clients.