Can we choose whoever we want to inherit our pensions? STEVE WEBB replies

My wife and I both have Sipp drawdown pensions, and we are both retired and drawing down on them.

Obviously when one of us dies we have in place that the pension will go to the surviving spouse.

But as we have no children or a family member we wish to leave our pensions to, after that can we choose anyone we please? For example a close friend and their children?

Steve Webb replies: The good news is that in the case of ‘pot of money’ type pensions such as yours, there is no restriction on who you can leave your money to.

This can be a person, a trust or a charity as you wish.

For more traditional salary-related pensions, any ongoing pension generally passes only to a spouse or partner or any financially dependent children aged under 23, after which it ceases.

As you may be aware, in most cases the decision as to who gets your money is taken by the pension scheme administrator, informed by any ‘expression of wishes’ form you have completed.

In technical language, this applies where a scheme is set up ‘under discretion’, which is currently the norm.

Note that it is the scheme which will decide where the money goes and not anything which may be specified in your will.

In most cases, the pension scheme is likely to pay out in line with the wishes you have set out, but sometimes they may use their discretion to do something different.

One example would be if the form was completed some time ago when you were first married and nominated your first wife or husband, but you have since remarried and not updated your form.

In this case the scheme would have to take a judgment as to who you might have wanted the money to go to if the expression of wishes form had been up to date.

In the example you have given, it would be entirely appropriate to put in writing that you want the balance of your pension to go your spouse if they survive you and then to a named friend if not.

Where someone wants to leave money in a relatively unusual way (for example, outside the immediate family) it can be helpful to provide additional information to the scheme as to the reasons for your preferences.

Such additional explanation could offer reassurance to the pension provider that they were acting in line with your free and genuine wishes in the event of any challenge by someone else who thought they should get some (or some more) of your money.

This can be particularly important if the expression of wishes is changed when someone is elderly and potentially more vulnerable to improper influence.

You can also make sure that any financial adviser is familiar with your thinking and/or that you include something in writing to be held by your solicitor alongside your will.

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In the event that the scheme administrator asked your solicitor or adviser for their views, the fact you had lodged a letter with them setting out your wishes could provide additional comfort, especially if you had also discussed your plans with your adviser or solicitor.

A slightly separate point for people to bear in mind when nominating people to inherit their pension pot is that those who are mentioned by name have more options as to how they use their inherited pot.

Someone named on the form (even with just a nominal 1 per cent allocation) can take their inheritance as drawdown rather than purely as a lump sum.

Given that inherited pension pots are subject to income tax (where the deceased is aged 75 or over), the ability to spread withdrawals through drawdown rather than be taxed on the full amount as a lump sum could be advantageous.

As ever, this question serves as a reminder to anyone with a pension to make sure they have told their pension provider who they want to benefit in the event of their death, and of keeping these wishes updated, especially following major life events.

An annual review to make sure everything is up to date could save a lot of heartache later.

I am grateful to Clare Moffat, pensions and tax expert at Royal London, for additional insights on this issue.