Advisers have been urged to ensure their clients' death benefits arrangements are up to date after a platform found one in four (28 per cent) of the death benefit forms received in 2016 and 2017 had posed problems.
Ian Browne, pensions expert at Quilter, urged advisers to check three aspects of inheritance tax planning to ensure their clients don’t miss out on their benefits.
He told FTAdviser the number of errors made was "shocking" and meant many pension death claims have either faced delays or were not passed on in the most tax efficient way, largely because of a lack of nomination, ambiguity, or challenge from beneficiaries.
Death benefits can be paid out in the form of a lump sum or in the form of a pension. But while lump sums can be paid to anyone, only certain types of beneficiary can receive a pension, these being ‘dependants’, ‘nominees’ and ‘successors’.
A nominee is a beneficiary who has been nominated by the client as part of a death benefit nomination.
Mr Browne said: "Make sure that their nomination is up to date and provides the flexibility for other beneficiaries outside of those who are dependent on them, to be able to receive the pension benefits.
"Make sure that the pension contract has the flexibility to offer both lump sum and beneficiary pension options (with the beneficiary pension option not being restricted by minimum age requirements). Many older contracts offer lump sum only options.
"Try and make sure that loved ones are involved in the legacy planning decision making in advance."
In February Royal London had warned more than 750,000 people could be passing their pension to the wrong person because they have not updated their nominations.
But in June, Neil MacGillivray, head of technical support at self-invested personal pension provider James Hay, warned adviser not be overly reliant on death benefits nominations, saying duty of care rules state scheme administrators must check the deceased’s family for dependants who may have a right to the inheritance, as well as a person’s will.
But Mr Browne said: "It’s a very emotional and challenging time when someone dies and the last thing anyone will want to deal with is challenges with finances.
"Advisers have the opportunity to set clients and their loved ones minds’ at ease with some simple planning."
According to Alan Chan, director and chartered financial planner at London-based IFS Wealth & Pensions, death benefits have always been "an important area of planning, and with the onset of pensions freedom it has become even more so to maximise tax-efficiency".
He said: "Many individuals are unaware that pensions are not part of their estate and so even if they have a valid will, it does not cover their pensions upon their death.
"So without exception, for all new pension clients we take on, we ensure that they complete a new nominations form every time.
"For existing clients, we would just check with them at regular intervals to keep their nominated beneficiaries up to date."
maria.espadinha@ft.com
