Pensions Ombudsman confirms entire SIPP may be disinvested on first instruction following member’s death

The determination also confirms that instructions are to be given by the beneficiary in this regard and not by the executor of the member’s estate. This is helpful confirmation that providers can act - where contrary provision in the scheme rules do not exist – without seeking instructions from all beneficiaries.

The Ombudsman’s decision shows that fair and workable administration can take priority over preserving every opportunity for investment growth. However, providers should still check that their product terms and scheme rules support the process they follow.

In this determination (13 pages/1.24 MB PDF), Mr M’s wife died in 2020 with a self-invested personal pension (SIPP). Mr M’s wife’s expression of wish form requested that the death benefits be distributed 50% to him and 25% to each of the couple’s children. The SIPP provider subsequently exercised its discretion in accordance with that nomination.

Mr M had several discussions with the SIPP provider regarding the treatment of the SIPP assets. The SIPP provider repeatedly informed him that the investments would remain invested and that he and his two children could make their own decisions regarding when and how to take benefits. Mr M’s understanding was that, if one beneficiary elected to take a lump sum, only that person’s proportionate share of the investment would be sold while the remainder would stay invested.

In July 2020, the SIPP provider issued a letter setting out the options as to how each beneficiary could receive their percentage shares of the death benefits. This letter confirmed the value of the SIPP was £173,186.91.

In September 2020, the son requested payment of his 25% lump sum death benefit. Upon receiving that instruction, the SIPP provider liquidated the entire SIPP in accordance with its normal process for the distribution of death benefits where there are multiple beneficiaries – to liquidate upon first instruction. Mr M subsequently complained that the whole fund had been sold contrary to the information he had been given and that he had lost the opportunity for future investment growth.

Had the SIPP provider provided correct information, Mr M’s son would not have requested immediate payment, and the family would have kept the SIPP invested for longer, the beneficiaries said. Mr M also argued that, as sole executor of his late wife's estate, the SIPP provider should have notified him and that therefore the instruction from his son was not valid.

The SIPP provider accepted that incorrect information had been provided and that the beneficiary had been misinformed about how the death benefits would be administered. It offered £500 for distress and inconvenience together with modest interest payments for delays in processing lump-sum payments. However, the SIPP provider maintained that if followed its standard process where there are multiple beneficiaries – that being to liquidate the entire SIPP when the first beneficiary requests payment. It said this approach protects against market movements and ensures each beneficiary receives the correct proportion of the fund. There was no evidence that the son would have deferred taking his benefits had different information been given, the PO stated.

The PO found that liquidating all investments following the first beneficiary instruction was a logical and reasonable administrative approach. Such an approach helps ensure beneficiaries receive the correct shares and are protected against market fluctuations affecting allocations between beneficiaries, it said. Nothing in the SIPP terms prevented the SIPP provider from selling all investments once a beneficiary requested payment, it found, adding that the SIPP provider was not required to seek consent from Mr M, the executory, before liquidating the investments and paying death benefits under the discretionary trust framework.

According to the PO, Mr M had failed to establish the necessary causation for a claim based on negligent misstatement. It considered that the alleged loss depended on the assumption that his son would have delayed taking benefits had correct information been provided, but that there was insufficient basis for that conclusion.

The PO said Mr M had available to him an alternative option, the beneficiary drawdown, which would have enabled him to hold the funds in a new beneficiary SIPP in his own name and keep the sum invested and therefore mitigate any loss. Mr M had not wished to take this approach, as in contrast to taking his benefits as a lump sum, amounts drawn down would be subject to tax.  It was therefore simply a question of the point in time at which the lump sum was taken, which had to be within two years of the member’s death to retain the tax advantaged status.

Accordingly, the PO did not uphold the complaint and concluded that the SIPP provider's existing offer of £500 for distress and inconvenience in relation to the initial misinformation was appropriate.