“When we have shuffled off this mortal coyle …the rest is silence” … but not for our pension death benefits, methinks!
Hamlet’s words in Shakespeare’s longest play (30,557 words if you want to count them!) reminded me of a very, very important aspect about death. Well, not so much about death – more about the death benefits of pension schemes, actually!
When someone who is a member of a pension scheme dies, the people they leave behind may be entitled to valuable benefits. This could be in the form of a regular pension, a lump sum, or both. But who gets those benefits?
These days, with divorce, separation, remarriage, longer life and so wider age ranges of potential beneficiaries, more common, it can be far less obvious who should get any benefits from your pension scheme when you are gone. In particular, if you have not told your pension scheme or pension provider about your wishes and about your current family circumstances, there is a risk that the person who benefits is not the person you would have wanted to benefit. This includes schemes you may no longer be contributing to but which will still provide you with benefits when you retire.
Different sorts of Pension Scheme:
There are two key types of pension scheme with key differences between who can get what:
Defined Benefit (DB) Pensions – If you die after you have started to receive a DB pension, schemes are generally required to pay a regular pension to a surviving spouse. If you die before you reach pension age but after you have left the company, the scheme may pay a lump sum benefit to a nominated recipient. If you die while you are still an active member of the scheme, there may be an extremely valuable ‘death-in-service’ benefit payable, often based on a multiple of your annual earnings.
Defined Contribution (DC) pensions – If you have taken your pot of money and turned it into an income for life (or an ‘annuity’) then whether there is anything for your heirs depends on the sort of annuity that you have bought. If you still have money in your DC pension pot which you have not turned into an income for life or if it is being held in an ‘income drawdown’ account post-retirement, this money is available to your heirs and you will need to specify who you want to benefit.
The key difference between the two types of scheme is that whereas with a DB pension an ongoing ‘survivor’s pension’ will only usually be paid to a spouse or partner (or a dependent child), with a DC pension you can nominate other people – such as grown-up children – to be the beneficiaries of your pension pot.
Discretion or Direction:
Schemes will have different rules and processes they go through to determine how pension death benefits are allocated. However, when joining a scheme typically you will be asked to fill in an “Expression of Wishes” form which allows you to say who you would like to receive your death benefits when you die.
Scheme members currently have two options open to them when working out how death benefits can be allocated. One option leaves the money potentially liable to inheritance tax while the other does not.
Discretion – The administrator can be asked to use their discretion when deciding who can receive the lump sum death benefit. This means the administrator should take the member’s wishes into account but is not bound by them. So for instance on the member’s death the administrator may find the member was divorced from the person named in their expression of wishes form and they had gone on to have children with someone else. In such a case the administrator may choose not to follow the wishes stated in the form. In such cases the lump sum death benefit would be free of inheritance tax.
Direction – If the administrator was given a direction by the member to pay the benefits to certain people then the administrator must comply with the request even if the member’s circumstances had changed. In such a case the value of death benefits would be included in the deceased’s estate for inheritance tax purposes, and so potentially taxable.
What can you do?
This is the important bit:-
(*) Keeping your documentation up to date will help trustees and pension providers to work out what your personal circumstances are so they can make an informed decision when allocating death benefits;
(*) Updating your Will (not Shakespeare this time!) is extremely important; as is
(*) Reviewing any Expression of Wishes forms for any pensions you have, or had, held during your career.
So is it going “to be, or not to be, that is the question”!
We have set out above what is only a brief summary of some key points that involve quite complex rules. Always take relevant professional advice before taking, or refraining from taking, any action.
Remember, we are here to help so please do not hesitate to contact us regarding your financial planning situation. Reviews and our Lifetime Financial Planning service are part of our added-value services for our clients.
We have set out above what is only a brief summary of some key points that involve quite complex considerations. Allowances, caps, levels and bases of, and reliefs from, taxation are subject to change and their value to you will depend upon your personal circumstances. Information and data may change after the date of their original promulgation in our Newsletter or this Focus article. Always seek relevant professional advice before taking, or refraining from taking, any action.
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