Passing on death benefits

4 May 2021
Clare Moffat and Fiona Hanrahan look at the facts behind pension death benefits.

Listen to our latest podcast where Clare Moffat and Fiona Hanrahan from our Intermediary Development and Technical team discuss pension death benefits and cover topics such as how pensions flexibility has helped intergenerational planning and how to make sure beneficiaries have the full range of options they would like. 

Q: So in 2015 pensions freedoms had an impact on death benefits in defined contribution schemes.  Can you tell us a little bit more about this?

So the first thing to say is that this only applies to schemes that are fully flexible DC schemes.  Some DC schemes have chosen not to apply the changes – maybe old occupational schemes. So if flexibility is important to members – they need to check their scheme.

In a fully flexible discretionary scheme when member dies, the Scheme Administrator assesses all the evidence including any EoW and they decide on the potential beneficiaries. The beneficiaries can refuse the benefits and this might happen more so that benefits can move through the generations. Who receives the benefits determines what they are called.  An example of a dependant is a spouse, civil partner or a child under 23 (or older if they are disabled). But a separated spouse is still a dependant in HMRC terms and that can have implications.

A nominee is anyone else who has either been nominated by the member or the scheme administrator. The beneficiary accepts the benefits then decides what they would like – lump sum, annuity or drawdown or potentially a mixture. If the beneficiary takes lump sum or annuity then that money leaves the pensions system. It can only be passed on after that B death if they go into drawdown.

It is then the beneficiary’s own fund but with no age restrictions. Perhaps we will see grandparents expressing a wish that grandchildren receive death benefits as their children are comfortable – good intergenerational planning. Children in drawdown adds more complexity as advice will probably be about school fees or university planning rather than income in retirement.

The member can’t dictate how their beneficiaries take the death benefits. They can only express a wish (in a discretionary scheme) who should receive the benefits. Some people don’t like this for example, the gentleman who wrote in his EoW that he didn’t want his wife to take a lump sum as she would “spend it all on shoes and handbags”. If your client is worried about what their 18 year old would do with a large cash sum then a SBT might be the answer.

Q: So that’s the situation on first death but tell us how pensions can “cascade through the generations”?

If on the first death the money goes into drawdown then it can move through the generations. But each time the person holding the fund dies, their beneficiaries (who are all legally called successors from second death onwards) could take it as lump sum, annuity or drawdown.

But remember it might not cascade through the generations. Let’s think of an example. Husband receives large pension pot on death of his wife and goes into drawdown. He remarries, then dies leaving fund to his new spouse. On her death she leaves it to her children who are not related to the original member. The money has left the bloodline. Planning here is important. Should the original member express a wish that there are multiple Beneficiaries? Or if control is more important – a SBT could be the answer. 

Q: So every beneficiary can chose how to take the benefits?

Well.  It depends….the scheme has to be fully flexible but also it depends on who is receiving the benefits. On first death, if the scheme administrator picks a beneficiary but there is still a dependant alive then that beneficiary can only receive a lump sum? A couple may have been separated for 20 years but never divorced. Investigations show that the member wouldn’t have wanted them to receive the death benefits. 

But if any children are over 23 and they are chosen they can only choose a lump sum and that could mean that a lot of income tax is paid.  So it’s really important for expression of wish forms to be kept up to date with anyone that might potentially be a beneficiary to make sure that beneficiaries have the most choice.

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.