Out-Law Guide 2 min. read
28 Oct 2019, 11:57 am
Sometimes who gets what pension benefit is automatic. However, the pension scheme trustees usually have discretion to decide who receives any lump sum payment. This is because lump sum death benefits paid in this way are not part of your estate for inheritance tax purposes. In most cases, the member will have signed a death benefit nomination or expression of wishes form. Trustees are not obliged to follow the instructions on an expression of wishes form, but do need to take them into account.
Trustees should establish a plan for dealing with death benefit cases. Good practice might involve ensuring that employers or scheme administrators inform the trustees as soon as a pension scheme member dies. Trustees should prepare a report within a month of the death detailing what benefits are payable and who the potential recipients are. This report should then be considered at the next trustee meeting where trustees should decide if a benefits payment should be made, or whether further investigations are required.
It is usually a good idea for trustees to request a copy of the dead person's will. It may explain why the spouse or next of kin is not always provided for on the expression of wishes form.
Trustees need to investigate the member's domestic, personal and financial situation. They could ask the member's immediate colleagues or those named in the expression of wishes form for information. If writing to potential beneficiaries it is important to be sensitive. The Pension Ombudsman has in the past forced trustees to apologise for writing to a widow in a 'casual, indifferent and unfeeling' way.
Trustee boards should think carefully before they delegate death benefit decisions to individuals or small groups within the trustee structure. It is important to check whether pension scheme rules allow the board of trustees to delegate decisions in this way. Trustees will probably wish to retain control of all but the very straight-forward cases and any delegated decisions should probably be reviewed at trustee meetings.
Trustees need to give reasons for their decisions. These should be carefully worded to avoid infringing the right to privacy of potential beneficiaries.
Death benefit payments and payments to children
HMRC permits pension death benefits to be paid only to a restricted category of people. There are no similar restrictions in respect of lump sum death benefits, but there may be under the scheme rules. Lump sums must be paid within two years of the time the trustees learnt of the member's death otherwise a tax charge will be payable.
Pensions are usually payable for life, but pensions paid to a child will usually need to stop by the time the child reaches the age of 23. Trustees should put arrangements in place to ensure pensions stop at the right time. It may be possible to pay a child's benefit into a separate trust, or to someone on the child's behalf.