Only 7% of UK pension holders know how their pension funds will be treated in the event of their death, with only 4% understanding how those funds will be taxed, a UK broker has found.
The research, by online pension, mortgage and investment platform and provider AJ Bell, has prompted the firm to write to Philip Hammond, Chancellor of the Exchequer, seeking reform.
Specifically, it calls for the abolition of the discretion providers currently have around how pension death benefits are distributed, with all pension death benefits remaining free of inheritance tax.
Andy Bell, chief executive at AJ Bell, pictured above, described the way pension death benefits are taxed as “one of the most generous outcomes of the pension freedoms” but stated that this this is lost on the vast majority of people.
Most policyholders, he said, assume the funds will automatically go to their nominated beneficiary, without realising that their pension provider currently has discretion to alter that.
“In the new era of pension freedoms,” said Bell, “this control should remain with the pension holder, not the pension provider.”
A substantial number of people are affected by this issue, with nine million people contributing to personal pensions in the UK.
On these figures, therefore, this would mean that about 8.4 million UK consumers don’t understand the death benefit rules introduced as part of the pension freedoms.
Findings of the research
AJ Bell interviewed 985 UK adults who have a personal pension. They were asked whether they know what will happen to their pension fund upon their death. The research showed that only 7% can correctly identify that their pension provider will decide who it goes to, taking into account their nominated beneficiaries.
Half (51%) assume it will automatically go to the person they have nominated as the beneficiary of their pension. Some 14% think it will form part of their estate and be distributed as per their will, and a quarter (25%) admitted they don’t know.
When it comes to how their pension will be taxed upon their death, only 4% of people questioned correctly identified that it would be tax free if they die before age 75 and subject to income tax of the beneficiary if I they die post 75.
A majority (58%) admitted outright that they don’t know while some others thought it would be subject to the main forms of taxation such as income tax (10%) or inheritance tax (14%). 11% thought it would be tax free.
Additionally, only one in five British adults with personal pensions (18%) have nominated who they would like to receive their pension on death within the last three years. A third (32%) have never nominated a beneficiary and another third (35%) nominated their beneficiary over five years ago.
Family circumstances change regularly – there are around two million life events that could affect these nominations such as births, deaths, marriages and divorces every year in the UK – and so the majority of these nominations are likely to be out of date.
AJ Bell’s proposal
In a statement, the firm said: “AJ Bell is calling on the Treasury to provide a blanket IHT exemption on pension death benefits regardless of who they are paid to.
“This would enable provider discretion to be removed from pension death benefits and bring a degree of simplification to an area that is clearly not well understood by consumers.
“All pension providers could then adopt a standard way of paying death benefits to the people nominated by the pension holder in the first instance or to the people identified by the executor of the pension holder’s estate if the nominated beneficiaries cannot be found.
“The result would be a simpler system that people have a better chance of understanding and would be aligned with the pension freedoms which give people greater choice and control over how their pension savings are used.”