- Nominate your spouse as the beneficiary of your pension as well as writing a will
- If your will has mistakes it could be invalid
- If your spouse is less interested in investing than you are, make your portfolio less labour-intensive to manage
If your spouse or civil partner’s wellbeing and financial security is one of your priorities, you should ensure that they are also well provided for after you pass away. And a way to help achieve this is to make sure that your assets pass to them as easily and as quickly as possible.
If you have a workplace or personal defined contribution pension, nominate your spouse or civil partner as the beneficiary of your pension. “Your pension won’t normally form part of your estate, so won’t be covered by your will,” explains Clare Moffat, pensions & legal expert at Royal London. “Instead, fill in a nomination of beneficiary form so that the pension scheme knows who you would like to receive it.”
If no beneficiary is nominated to receive your pension, it could result in delays as the trustees would need to investigate and nominate beneficiaries. There is also no guarantee that all of the funds would be passed onto your spouse after you die.
If you are already drawing down your pension, your spouse may be able to continue to do this. But for this to happen, most providers require the pension to be transferred into your spouse's name, so it is important to have nominated beneficiaries to receive your pension before taking benefits.
Some schemes also restrict the available death benefits if no one is nominated to receive a pension after the member’s death.
If a workplace or personal pension doesn’t offer a full range of pension death benefit options the provider often has to pay the funds out of the pension to the surviving spouse as a lump sum. For example, they might stipulate that the pension is taken as a lump sum within two years of your death rather than via nominees’ drawdown. This means that the money that was in the pension is no longer in a tax-efficient wrapper, resulting in tax implications. “Make sure the pension offers a full range of options in terms of death benefits,” says Anthony Villis, chartered financial planner at First Wealth. “This will give the beneficiaries flexibility in how benefits are taken and can result in in large tax savings.”
Some older style pensions cannot be passed onto beneficiaries after you die. So if you want your spouse to have choices in terms of what they can do with the pension they inherit from you, it could be worth transferring into one which offers more options. But before doing this check the terms and conditions of the plan, because if you transfer out of some pensions you can lose valuable benefits such as guaranteed fund values at a given date, guaranteed annuity rates and the ability to take more than 25 per cent of them tax free.
Also see When should I consolidate my pensions? (IC, 18.02.22)
If you are employed and have death in service benefits also ensure that you have nominated your spouse to receive this.
Keep an up-to-date will, ideally working with a solicitor rather than writing one yourself with a ‘DIY’ kit. Omissions or errors can result in the will being invalid. “It is very easy to use ambiguous language, unintentionally omit assets, or invalidate the will if it is not correctly signed and witnessed," explains Jocelyn Davis, estate planning technical specialist at Tilney Smith & Williamson. "So it is advisable [for] a solicitor to draft and oversee the completion of the will on your behalf.”
An invalid will means that you have no control over who deals with your estate and who benefits from your assets when you die. The rules of intestacy dictate who receives your assets and how much they will receive, which will not necessarily be what you intended. So a valid will is particularly important if you also have children and want your assets splitting between them and your spouse in a particular way. Errors could also mean it takes longer for probate to be completed on your estate, resulting in higher legal costs and so less of your estate going to beneficiaries.
If you want to change how you leave your assets you need to write a new will, although minor amendments can be set out in a supplementary document called a codicil. A new will is particularly important when you marry or enter a civil partnership, and live in England or Wales, because these events revoke wills written before them – unless the will is made in contemplation of the marriage. “This is when someone makes their will prior to entering a legal union and inserts a clause acknowledging that it will take place to a specified person in the foreseeable future and that the marriage will not revoke the terms of the will,” explains Davis.
A marriage or civil partnership does not invalidate your will in Scotland, but it is still important to review it when entering a legal union, and get appropriate legal advice.
If you live with your partner but are not married or in a civil partnership, an up-to-date will is even more important as they don’t have automatic inheritance rights like spouses and civil partners. Not having a will or an invalid will would mean that anything which belonged to you would go to your relatives, even if you had cohabited with your partner for many years.
“Make sure that your spouse and the executors of your will are aware of your wishes,” adds Villis.
Your spouse should know where your will and other important documents are. “Put together a folder for your spouse to go to should you pass away,” suggests Villis.
Octopus Investments has a downloadable form on its website called 'What I own and where I keep it' in which you can list all the important financial details your spouse or beneficiaries will need after your death at https://media.octopusinvestments.com/m/3bec2920b3d33504/original/What-I-own-and-where-I-keep-it.pdf.
If your spouse is going to be financially dependent on what you leave to them, estimate if this will be enough to provide for their needs – especially if they are retired. It could be worth getting professional financial advice on this, which would also be useful for ensuring that your finances and assets are as tax efficient as possible.
“If necessary, you could get a life policy for the benefit of your spouse,” says Villis. “This could provide funds to repay a mortgage or cash to replace the loss of your income. But make sure that any cover is suitable and meets your objectives.”
He also stresses the importance of involving your spouse in your financial affairs and, if you have one, meetings with your financial adviser.
When you die your beneficiaries cannot claim your assets until probate on your estate has been completed. So David Goodfellow, head of UK financial planning at Canaccord Genuity Wealth Management, says to ensure that your spouse or civil partner has accessible money in the short term to cover them until the probate is complete. Probate can take 12 to 18 months.
If you have life assurance it should be written in trust so that it does not form part of your estate. “If it is not in trust the benefits won’t be paid out until the probate is granted,” explains Goodfellow. “This is there to, for example, pay off mortgages and ensure that the [surviving member of the couple] has short-term liquidity.”
He adds that it can be easier for your spouse if not all your assets are in your name when you die. He suggests having some joint accounts and or each member of the couple holding a decent level of assets. Doing the latter can also be more effective for tax purposes. For example, if you both use your full annual Isa allowances you can shelter more investments from tax.
When you pass on assets to your spouse the transaction does not incur inheritance tax (IHT). They also inherit as much as you have not used of your IHT allowance, which is currently £325,000, and as much as you have not used of your residence nil rate band of £175,000 which is applied if you pass your main residence to direct descendants. These allowances also have the relevant values at the time of your spouse’s death rather than yours. So, for example, if you and your spouse have not used any of your allowances at the time of the second death the survivor effectively has double their allowance. For the IHT allowance today that would be two times £325,000, so £650,000. Or if you had, say, used 25 per cent of your IHT allowance at the time of your death your spouse would have their IHT allowance plus 75 per cent of a full IHT allowance at the time of their death.
However, assets you leave to your spouse increase the value of their estate so it may still exceed the value of their total allowances. Therefore still plan ahead to ensure that your spouse’s estate does not have to pay excessive amounts of IHT when it passes to their beneficiaries.
This could include making lifetime gifts to children or grandchildren. But if you want your spouse to continue to have accessible assets you could instead invest in assets that benefit from business relief so fall outside your estate after you have held them for two years, meaning that they do not incur IHT. These include certain Aim-traded shares.
If you die within two years of purchasing business relief investments but pass them onto your spouse, the time period from purchase continues. So, for example, if you died 18 months after investing in business relief assets and they passed to your spouse, they would only have to hold them for a further six months before they become IHT free.
If there is likely to be an IHT liability Goodfellow suggests insuring "both your lives on a second death basis so that there are funds for your beneficiaries to pay some or all of the IHT liabilities”.
Preparing your portfolio
Villis suggests consolidating and tidying up your assets where possible as it makes them easier to locate and manage after you die. So, for example, if your investments are held in various different Isas with different providers you could transfer them into one. To ensure the efficient transfer of your Isa after you die, Vallis says to also make provision for this in your will so that the executors are aware of your wishes.
See more on how to pass your Isa to your spouse in How to get the most out of an Isa (Isa supplement, IC 11.03.22).
If you and your spouse already run your investments together and they are very engaged, they can continue to do this. But if your spouse is not as interested in investing as you are it might be better to organise your portfolio to make it more manageable for them.
If your spouse wants no involvement in managing assets, it could be worth helping them to find someone suitable to do this on their behalf.
If your spouse is willing to do a bit of monitoring and management, the portfolio could be largely or entirely invested in a multi-asset fund which has an objective in line with their investment objectives. For example, if they have a wealth preservation objective, a fund “like Personal Assets Trust (PNL) encompasses cash, bonds, gold and equities all in one place and could be used to leave a much simpler portfolio,” suggests Ryan Hughes, head of investment research at AJ Bell.
If your spouse is willing to determine and monitor their asset allocation, but not to spend time researching investments, Hughes suggests investing the portfolio in passive funds such as trackers or exchange traded funds (ETFs).
If your spouse has a reasonable amount of interest in investing, but doesn’t want to spend as much time on it as you do, you could simplify the holdings and focus the portfolio on the key core investments. You could sell “niche investments that are not integral to the overall strategy so that the portfolio is in a robust shape to hand over”, says Hughes.
At the very least, if you have direct share holdings, Nick Bird, head of strategic growth at Octopus, says that switching these into funds would reduce the amount of work your spouse would have to do to manage the portfolio.
But if investments held outside pensions and Isas have built up a large capital gains tax (CGT) liability, do not sell more than what you can offset against your annual allowance, which is currently £12,300, and losses. CGT liabilities go to nil after you die so if there is one, your spouse could sell the investments without incurring the tax liability built up while you held the assets. They could then reallocate the proceeds in a more appropriate way, if necessary, with the help of an adviser.
Similarly, if you own and manage buy-to-let properties which have built up a CGT liability and your spouse does not want to manage them after you die, Bird says that your spouse could sell them after your death.