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Pensions Doctor: Failure to make wishes clear leads to draw down roulette

Pensions Doctor: Failure to make wishes clear leads to draw down roulette

Laura faces drawdown roulette when it comes to her late companion’s Sipp, after he omitted some key paperwork.

THE CASE

Laura has recently lost her partner Arnold, at age 60. She and Arnold had been living together for three years and neither has children.

Laura and Arnold were not married, as Arnold had an estranged wife, Sofia. Although the split was fairly amicable, they had not spoken in several years and had never got around to divorcing. When Sofia heard of Arnold’s death, she passed her condolences to Laura and reassured her she does not expect or want to inherit anything from Arnold.

Arnold had a Sipp that Laura believes she will inherit. She plans to establish a beneficiary’s drawdown account with the money. Laura does not want to purchase an annuity, as she has other sources of guaranteed income and is concerned her outgoings may fluctuate temporarily as she adjusts to her new situation. She also does not want a lump sum, as she has no immediate need for the entire amount.
Laura has recently learned from Arnold’s scheme administrator that he had not completed an expression of wishes in relation to the Sipp.

THE PRESCRIPTION

Looking at Arnold’s circumstances, the scheme administrator is very likely to choose Laura as the beneficiary for the Sipp.

The administrator might normally consider paying to a spouse first. But Arnold’s situation and Sofia’s stance makes it clear this is not the best option. Arnold had no other close family to consider.

Laura’s preference for drawdown is likely to be the best option for her circumstances. It will give her the flexibility to withdraw the income she may require in the short term.

Meanwhile, it will keep the remaining funds in a tax-efficient environment, and out of her own estate, until needed. It will also potentially enable her to pass any residual funds on tax efficiently on her own death.

Defining ‘dependant’

However, because Arnold had not left an expression of wishes, drawdown might not be an option for Laura. In the absence of an expression of wishes, the legislation states that:

● If there are no surviving dependants, the scheme administrator can offer drawdown to any chosen beneficiary.

● If there are surviving dependants, only the dependants can have drawdown. Any other beneficiary chosen can only receive a lump sum death benefit.

As Arnold was still legally married, Sofia is classed as a dependant.

This means Laura will only have the option of drawdown if she can also be classed as a dependant. There are several definitions of a dependant, but only one Laura might meet: she will need to show she was financially dependent on Arnold, or their finances were mutually dependent.

Uncertain judgement

It is for the scheme administrator to decide whether they think Laura meets this definition of a dependant.

She will need to provide information to the administrator, such as bank statements, mortgage statements and bills, to give a clear picture of her situation with Arnold.

In some cases, this could prove to be relatively straightforward and an easy judgement for the administrator to make. However, each case will be different, as will each scheme administrator’s requirements.

If Arnold had two Sipps, it is possible one administrator would class Laura as a dependant, while another would not.

If Arnold had completed his expression of wishes and kept it up to date as his circumstances changed, this situation could have been avoided. Laura could have been offered beneficiaries’ drawdown without question.

Jessica List is pension technical manager at Curtis Banks Group

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