What is a beneficiary? is a question that comes up often. 

That may be because that, according to a Royal London study, only a fifth of UK residents between the ages of 18 and 34 have a will.¹

And even if you have a will, what about life insurance? 

Not keeping your designated beneficiaries up to date could be a big mistake.

In this article, the EveryInvestor team will take a look at why beneficiaries are important and how to choose the right ones. We hope that this overview will help you when making your own decisions about your estate.

At EveryInvestor, our goal is to maintain high standards of accuracy and comprehensiveness in the information provided. The information in this article is derived from analysing the latest news and opinions on beneficiaries. It is reviewed, fact-checked, and updated to ensure it remains current, relevant, and of high quality.

This article has been prepared based on research conducted by financial experts, and it does not involve the use of AI assistance. 

While considering estate planning and financial decisions, it is essential to remember that this article is for information purposes only and not a substitute for professional advice.

Who Can Be a Beneficiary in an Equity Release Plan?

A beneficiary in an equity release plan can be any individual or entity that the plan owner decides to benefit from the proceeds of the plan.

Typically, these beneficiaries can include family members, friends, charities, or even trusts. The decision is entirely at the discretion of the plan owner and there are usually no legal restrictions on who can be named as a beneficiary.

However, it is worth noting that choosing a beneficiary should be done thoughtfully, considering potential tax implications and the financial needs of the beneficiary.

As experienced financial advisors, we recommend discussing your equity release plan with a professional to make sure it aligns with your broader estate planning goals.

This ensures you are making the most informed decision as you navigate this complex financial landscape.

What Is a Beneficiary?

A beneficiary is an individual or organisation entitled to receive benefits from an arrangement such as a will, life insurance policy, trust, or pension. 

This definition may seem straightforward, but the beneficiary’s role can carry significant emotional and financial weight — whether you are the beneficiary or the one choosing who will inherit your assets.

Why is it so complicated?

If you are creating a will or naming a beneficiary on your life insurance policy, choosing the right beneficiary can be a complex decision that involves factors such as family dynamics, personal relationships, and future financial needs.

Additionally, it is important to consider the impact that naming a beneficiary can have on your loved ones. 

While providing a financial legacy for your beneficiaries can be a positive experience, it is also important to be mindful of the potential for conflicts or unintended consequences that can arise from your decisions.

Beyond the emotional and financial aspects, there are also legal considerations to consider when naming a beneficiary. 

Legal Considerations When Naming Beneficiaries

When naming beneficiaries, there are some legal considerations to be mindful of. 

Certain types of accounts, such as Individual Savings Accounts (ISAs) and Self-Invested Personal Pensions (SIPPs), have specific rules around how beneficiaries can be designated and how they can receive their inheritance.

Ultimately, when it comes to choosing a beneficiary, there is no universal solution. 

It is important to take the time to consider your options and seek professional guidance if needed to ensure that your wishes are conducted in the way that you intend.

Can Organisations Be Beneficiaries?

Organisations can be beneficiaries; it is not just individuals who can be named in someone’s will or policy. 

In the UK, businesses and organisations can be named as beneficiaries on life insurance policies or in wills. 

This provides a way for individuals to support causes or initiatives that are important to them.

Naming a charity as a beneficiary in your will or on a policy can be a great way to leave a lasting legacy — and it could help you reduce your inheritance tax liability. 

Did you know?

According to Smee & Ford, bequests to charities totalled £21.3bln in 2022.²

It is important to remember that individual outcomes can vary greatly. The laws and tax regulations surrounding inheritance are complex and may lead to uncertain outcomes.

What Are Beneficiary Designations?

Beneficiary designations are specific instructions or legal documents that name the person or organisation that will receive your assets after you pass away. 

You can designate beneficiaries for your life insurance policy, retirement accounts, bank accounts, and other financial assets.

These designations take precedence over will instructions³ and are therefore crucial when it comes to setting up insurance policies, retirement accounts, and other financial instruments.

How does that work?

Imagine a situation where a policy still names your former spouse as the designated beneficiary.

In the event of your passing, your former spouse will receive the policy payout, even if your current spouse of twenty years is listed as your sole beneficiary in your will. 

Why Should You Choose a Beneficiary?

You should choose a beneficiary for your financial assets so that you have control over who receives your life insurance proceeds, retirement account funds, and other assets.

Selecting a beneficiary helps expedite the transfer of assets, bypassing the probate process, which can be time-consuming and costly. 

Also… 

Choosing a beneficiary allows you to provide financial security to your loved ones, ensuring they are taken care of and can access the assets you intended for them.

It is essential to remember that if you do not identify your beneficiaries, your assets will be distributed according to the laws of intestacy, which may not be what you want.⁴

How Do You Choose a Beneficiary?

You can choose a beneficiary by considering several factors such as the nature of the asset, the beneficiary’s ability to manage it, the beneficiary’s age, and their relationship to you. 

Some individuals may choose to name family members as beneficiaries, while others may choose to name a charitable organisation or other non-profit organisation. 

Legal advice can be beneficial in making an informed decision, even though choosing a beneficiary can be a personal and emotional decision. 

Remember…

It is possible to name multiple beneficiaries and specify how the assets will be distributed among them.

Additionally…

Naming beneficiaries in your will or your policies is not a one-off thing, where you can make a decision and then just forget about it.

Ideally, you should review your beneficiaries every five years, or whenever there is a significant change in your personal or financial circumstances. 

These changes can include circumstances such as getting married or divorced, having children or grandchildren, buying or selling property, and inheriting money or assets.

Common Mistakes When Naming a Beneficiary

It is not unusual for people to make a few common mistakes when naming a beneficiary. 

The biggest of these is, of course, not naming a beneficiary at all. 

Other mistakes include…

• Not reviewing your beneficiaries after major life events, such as marriage or having children. 
• Naming a minor as a beneficiary without specifying a guardian or trustee.
• Naming a person who is no longer eligible to benefit from your assets, such as a former spouse.
• Not naming contingent beneficiaries in case the primary beneficiary predeceases you.

What Types of Beneficiaries Are There?

There are different types of beneficiaries when it comes to wills, trusts, pensions, and life insurance policies some of which include special, general or demonstrative beneficiaries, dependants, successors and nominees.

A brief look at the different types… 

Will Beneficiaries

There are four main types of will beneficiaries in the UK, special, general, demonstrative and residual beneficiaries. 

Specific Beneficiary

A specific, legacy or pecuniary beneficiary is someone who receives a specific gift or sum of money from an estate before any other beneficiaries receive theirs. 

But this only happens once the estate’s debts have been cleared.⁵

General Beneficiary

A general beneficiary is someone who has been left a sum of money that can be paid out from any part of the estate that has not already been bequeathed to someone else.⁶

Demonstrative Beneficiary

A demonstrative beneficiary is someone who has been left a specific sum of money from a specific account. 

If there is not enough money left in the specified account, the money may be paid from a different account.⁷

Residuary Beneficiary

A residuary beneficiary is someone who receives property or money from the remainder of an estate. 

After all debts, liabilities, and bequests have been satisfied, what is left is called the ‘residue’.⁸

Trust Beneficiaries

There are two main types of trust beneficiaries in the UK, income and capital beneficiaries.

Income Beneficiaries

Income beneficiaries receive the trust’s income, either for a set period or for life.⁹

Capital Beneficiaries

Capital beneficiaries receive the trust’s capital and assets once the income beneficiary has passed away.¹⁰

Pension Beneficiaries

There are three types of pension beneficiaries who may receive unused pension funds if the pension-holder passes away, namely a dependant, nominee or successor.

Dependant

A dependant is someone who is financially dependent on the pension holder who will receive any unused pension funds when the pension holder passes away.¹¹ 

Dependents can be a spouse or civil partner or a dependent under the age of twenty-three.

Nominee

A nominee is someone who is not your dependent, but has been nominated by you to receive your unused pension once you have passed away.¹² 

Charities can also be pension nominees.

Successor

A successor is someone who has been nominated by a dependant beneficiary to receive their inherited pension funds in the event of their demise.¹³ 

Life Insurance Beneficiaries

There are two types of life insurance beneficiaries in the UK, specifically revocable and irrevocable beneficiaries.

Revocable Beneficiary

A revocable beneficiary is a designation that can be changed or revoked by the policyholder or account owner at any time, allowing flexibility in determining who will receive the assets or benefits.¹⁴

Irrevocable Beneficiary

An irrevocable beneficiary is someone who cannot be removed from a life insurance policy unless they give written consent that they may be removed.¹⁵

Other Types of Beneficiaries

There are other types of beneficiaries it is important to know about, charitable beneficiaries and beneficiary trusts. 

Charitable Beneficiaries

Charitable beneficiaries are charities that may benefit from the estate of a benefactor.¹⁶

Beneficiary Trusts

Beneficiary trusts are formed by charities that would like to receive donations but are unable to register with the Charities Commission (for reasons that may include the conducting of campaigning work).¹⁷ 

What Does It Mean if You Are a Beneficiary?

If you are a beneficiary, it means you are designated to receive assets or benefits from a person’s estate. 

These assets or benefits could include financial instruments such as insurance payouts, retirement funds, or property.

In some cases, you may also be responsible for paying any taxes due on the assets.¹⁸ 

Whether you will need to pay taxes on what you have received will depend on the size of the estate, the value of the gift, and your relationship to the deceased. 

An example…

Sarah’s grandmother passed away and left her a sum of money in her will. 

Sarah’s grandmother’s estate, worth £1.5mln, is above the UK’s £325,000 inheritance tax threshold. 

Consequently, an inheritance tax bill of £540,000, at a rate of 40%, must be settled from the estate, reducing its worth to £960,000. 

Sarah’s inheritance, received after the tax is paid, may also incur inheritance tax if it’s total exceeds £325,000. 

Any tax due is based on the value of her inheritance that surpasses the threshold.

In Sarah’s case, while she stands to receive a substantial inheritance, she may also face challenges such as disputes over the will, unexpected tax implications, or complications arising from inheritance laws.

*This is a hypothetical scenario for illustration purposes only.

Consider…

The rules around inheritance tax are complex and come with their own set of risks. Individual outcomes may vary depending on the specific circumstances.

As a beneficiary, it is essential to be aware of potential risks. These could include unexpected tax obligations, legal disputes over the will, or complications arising from intestacy laws. 

It is recommended to consult with a professional to navigate these complexities and mitigate potential risks.

What Are Common Terms Associated With Beneficiaries? 

Common terms associated with beneficiaries include the ‘executor’, who administers an estate, the ‘trustee’, who manages a trust, and ‘heirs’, who are legal successors

Other terms you will encounter when reading about beneficiaries include:

Beneficiary Form

A beneficiary form is a legal document that names the person or persons who will receive the benefits of a life insurance policy, pension, or other financial asset upon the passing away of the policy owner or account holder.

Beneficiary Update Form

A beneficiary update form is a document that allows you to change the beneficiaries named on your life insurance policy, pension, or other financial asset. 

It is important to update your beneficiary forms regularly to ensure that your wishes are known and followed. 

This type of form is often used after big life changes, such as a marriage or the birth of a child.

Bequest

A bequest is a gift of property or money left to someone in a will. 

Bequests can be made to individuals, organisations, or charities.

Contingent Beneficiary

A contingent beneficiary is a person or entity named to receive benefits if the primary beneficiary cannot or does not want to accept them.

Designated Beneficiary

A designated beneficiary is the individual, trust, or organisation chosen to receive benefits or assets from a will, insurance policy, retirement account, or other contracts.

Life Insurance 

Life insurance is a contract stipulating that an insurance company agrees to pay a specified amount of money to a designated beneficiary in the event of the policyholder’s death.

Pension 

A pension is a regular payment made to someone after they retire. 

Pensions can be provided by employers, in the case of private pensions, or by the government, in the case of the state pension.

Primary Beneficiary

A primary beneficiary is the first in line to receive benefits or assets from a will, trust, insurance policy, or financial account. 

If they cannot accept the assets, the contingent beneficiary does.

Probate 

Probate is the legal process of authenticating a will and distributing the deceased person’s estate. 

This process includes paying taxes and debts and distributing the remainder to heirs. 

Trust 

A trust is a legal arrangement in which one person (the settlor) gives assets to another person (the trustee) to hold and manage for the benefit of a third person (the beneficiary).¹⁹

Trusts can be used for a variety of purposes, including estate planning, asset protection, and tax planning.

Will 

A will is a legal document that expresses your wishes for the distribution of your assets after you pass away.²⁰ 

A will can also be used to appoint guardians for your minor children and to make other important decisions about your estate.

When Do You Need to Update Your Beneficiary Designations?

You need to update your beneficiary designations regularly, especially if your circumstances change. 

For example, you may need to update your beneficiary designations if you get married, divorced, or have children, or if your beneficiaries pass away.

You can update your beneficiaries by contacting the institution holding the asset, will, or policy and providing updated beneficiary information.

Common Questions

In Conclusion

Understanding what a beneficiary is (and updating your beneficiary designations regularly) is a critical aspect of estate planning and ensuring that your assets are distributed according to your wishes. 

By following this simple guide, you should be able to make informed decisions about who to leave your assets to. 

From insurance policies to trusts and wills, navigating the complexities of this system can be overwhelming for many, hence the importance of clear and accessible guidance. 

While understanding your status as a beneficiary is critical, it is equally important to be aware of potential pitfalls and challenges, such as unexpected tax liabilities and potential legal disputes.

Ultimately, remember that even amidst such complexities, the question, ‘What is a beneficiary?’ dilutes to a simple answer: A person who stands to benefit.