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Only seven per cent of UK adults who have a personal pension can correctly identify how their pension funds will be treated on their death and only four per cent can correctly identify how they would be taxed, according to new research from AJ Bell. Nine million people contribute to personal pensions in the UK, suggesting that around 8.4 million UK consumers don’t understand the death benefit rules introduced as part of the pension freedoms.
The platform and pension provider has written to Philip Hammond, Chancellor of the Exchequer, calling for the discretion providers currently have around how pension death benefits are distributed to be removed, with all pension death benefits remaining free of inheritance tax.
Andy Bell, chief executive at AJ Bell, comments:
“The way pension death benefits are taxed is one of the most generous outcomes of the pension freedoms but this is lost on the vast majority of people. Most of them also 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 this control should remain with the pension holder, not the pension provider.”
985 UK adults who have a personal pension were asked whether they know what will happen to their pension fund upon their death. The research showed that only seven per cent can correctly identify that their pension provider will decide who it goes to, taking into account their nominated beneficiaries.
Half (51 per cent) assume it will automatically go to the person they have nominated as the beneficiary of their pension. 14 per cent think it will form part of their estate and be distributed as per their will, and a quarter (25 per cent) admitted they don’t know.
When it comes to how their pension will be taxed upon their death, only four per cent 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 per cent) 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 per cent) or inheritance tax (14 per cent). 11 per cent thought it would be tax free.
Additionally, only one in five British adults with personal pensions (18 per cent) have nominated who they would like to receive their pension on death within the last three years. A third (32 per cent) have never nominated a beneficiary and another third (35 per cent) 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.