Death benefits: Discretion and how to nominate a beneficiary

Published  15 January 2025
   10 min read

This article describes how discretion works and how a nomination form (expression of wish) can be used to let the scheme administrators/trustees know the individual’s wishes as to whom death benefits should be paid to.

Our article on Direction describes what direction is and when it may be used. 

 

Important Information

In her Autumn 2024 Budget statement, Rachel Reeves announced the government’s intention to bring unused pension funds and death benefits within the value of an individual’s estate for inheritance tax purposes from 6 April 2027.

More detail can be found in our article Inheritance tax on pension death benefits from April 2027.

The following article is correct based on the current legislation and takes no account of the government’s proposed changes.

Key facts

  • Generally, paying death benefits at the discretion of the scheme administrator/trustees will mean benefits are not included in the value of the estate and therefore do not increase the inheritance tax liability.
  • An individual can provide a nomination/expression of wishes form to the scheme administrator/trustees to let them know who they want their benefits paid to, but this is not binding on the scheme administrator/ trustee.
  • Once a plan is set up under discretion, the individual can’t subsequently choose direction under that scheme.
  • Beneficiary drawdown, if available under a plan, can only be offered to a dependant or a nominee of the deceased. 

What is discretion?

When a member of a pension scheme dies, the scheme administrator/trustees must pay the death benefits to someone. The process of choosing the beneficiary(ies) can either involve the scheme administrator/ trustees using their discretion, or the individual directing the choice (known as direction), when the plan is first taken out. This can be done by completing an expression of wish/nomination form, or where available can be done online. The way the choice is made can affect the inheritance tax due by the estate.

Discretion is the default position with most pension plans where the scheme administrator/trustees use their discretion when deciding who should receive the death benefits from the pension arrangement. The individual can tell the scheme administrator/trustees who they would like them to pay death benefits to (sometimes referred to as an expression of wishes), but the scheme administrator/trustees doesn’t have to follow their wishes. This usually means the value of the pension savings won't be included in the value of the individual’s estate for any inheritance tax calculations.

Opting for discretion is a one-off decision and if the scheme administrator/trustees are asked to use discretion, the individual can’t change their mind and opt for direction later. This means direction can only be selected at outset of a new plan. 

The rest of this article discusses discretion and how to nominate beneficiaries. See our article on Direction to see the limited circumstances where it would make sense to use direction.  

How does the scheme administrator/trustee use their discretion?

If the scheme administrator/trustees are asked to use their discretion when paying a death benefit, they will consider the individual's wishes, but they aren't bound by their request.

Discretion does mean a certain loss of control by the individual. Although the scheme administrator/trustees will usually follow the individual’s wishes, they don’t have to. The scheme administrator/trustees must investigate the individual’s personal/family circumstances at the time of death and may end up distributing the death benefits differently to the individual’s wishes. The scheme administrator/trustees won’t go against the individual’s wishes lightly and the reason for the decision has to be justifiable in a court of law if need be. 

Discretion can be particularly useful if the individual hasn’t kept the expression of wish form up to date and original beneficiaries have died and/or potential new ones have been born or acquired. 

Will the pension benefits be included in the value of the estate for inheritance tax if the benefits are paid by discretion?

No, the benefits are not normally included. There are limited circumstances where the benefits could be included. These are:

  • There is a transfer of pension savings when the individual is knowingly in ill-health and does not live for two years following the transfer. The same applies where a trust is set up to receive the death benefits from a pension plan that is not held under trust, for example a retirement annuity contract/s226.  
  • Where contributions outside their normal pattern of contributions have been made within two years of death and the individual was in ill-health when these were made. See more here.
  • The deceased individual made contributions to a pension scheme for someone else who was not their spouse or civil partner and not as an employer and the payment of the contribution (transfer of value) didn’t fall within the normal expenditure out of income exemption. 

You can find out more information about inheritance tax and pensions in HMRC’s IHT manual.

Do all pension plans allow benefits to be paid by discretion?

No, some pension benefits must be paid using direction, unless a trust is set up. This is usually for products like Section 32s and retirement annuity contracts (also known as section 226s).

Care needs to be taken around certain death benefits paid from annuities (an annuity protection lump sum death benefit or a guaranteed period). Depending on how the annuity was set up these may be included in the estate for inheritance tax purposes.  

Can discretion be changed to direction?  

Opting for discretion is a one-way street – once the decision is made, the individual can’t subsequently choose direction under that scheme. This is because, if the inheritance tax treatment for discretion is to apply, HMRC say direction can’t be available at any time under the scheme after discretion has been chosen.  

The only way discretion can be changed to direction is if the individual transfers and choses direction under the new scheme. Care needs to be taken if the individual is in serious ill-health and does not survive more than two years as the transfer could be included in the value of the estate for inheritance tax.

See our article on Direction for more detail on this.  

Why should an individual complete a nomination form?

The nomination form (or expression of wishes) is used for two purposes.

  • One is for the individual to tell the scheme administrator how they would like the death benefits to be split on their death. 
  • The other is so they can nominate, or name, a beneficiary to receive nominee flexi-access drawdown (a ‘nominee’).  

A scheme administrator can’t offer beneficiary drawdown to a beneficiary unless they’re a dependant, a nominee or a successor.

So not having a nomination (or having an out-of-date nomination) could result in potentially the wrong people being paid death benefits. Or the beneficiary(ies) not getting offered the option of beneficiary drawdown or an annuity. 
 
If the individual wants non-dependent children to be given the option of flexi-access drawdown, they need to nominate them. 

With this in mind, it's important to keep the nomination up to date, especially if an individual's personal circumstances changes. Most schemes provide a standard form to provide details of the individual’s beneficiary(ies) or offer online access. 

What is a nominee or successor?

A nominee is an individual nominated by the member or the scheme administrator who is not a dependant. The scheme administrator can only nominate an individual where there is no surviving dependant, individual or charity nominated by the member. 
 
A successor is an individual nominated by a dependant, nominee or successor of the member, or by the scheme administrator. The scheme administrator can only nominate an individual where there is no surviving individual or charity nominated by the beneficiary. 

HMRC Pensions Tax Manual PTM000001: Nominee  
HMRC Pensions Tax Manual PTM000001: Successor  

Does the individual need to allocate a percentage to each nominee?  

They do if they want the death benefits split in these proportions. However, if they're nominating, say the children so they can be offered the option of flexi-access drawdown, if a spouse predeceases the individual or if the spouse declines the benefits, no percentage is needed, they just need to be named. Although as much information as possible is always useful. 

It’s worth noting that some providers insist on there being a percentage being used instead of nil percent.  

If a spouse has been nominated but says they would rather the death benefits were paid to the children, could the children have the option of flexi-access drawdown?  

If they were dependent on the individual, they could. If they weren't dependent on them, this option would only be available if the individual had nominated them.

Non-dependent children who haven’t been nominated can only be paid a lump sum death benefit. So, if an individual wants non-dependent children to have flexi-access drawdown as an option, they need to be nominated.

It’s worth remembering it is the decision of the scheme administrator/trustee who benefits are paid to.  

If an individual has been nominated by their parent on an expression of wish, can that individual request the death benefit be paid to their children (the deceased’s grandchildren) instead?  

No, the beneficiary can refuse the pension benefits, but they cannot then direct the pension scheme where to pay their share.

The individual wants their spouse to receive beneficiary drawdown on their death and their children to receive successor’s drawdown on the spouse’s subsequent death. Is this possible?  

The individual can't dictate what form of death benefit the spouse can receive; nor can they influence what happens on the spouse's death. All they can do is state who they'd like death benefits to be paid to on their death. If the scheme administrator is using their discretion, they use this information as a guide when deciding on the beneficiaries. 

What format the death benefits take is down to the beneficiary who will choose from the options available from the plan. If they choose flexi-access drawdown, they will be asked who they want any remaining funds to be paid to on their death.

If each succeeding beneficiary chooses nominee or successor flexi-access drawdown, it's possible for the death benefits to pass down the generations. However, as each generation can withdraw as much or as little as they like, the number of generations receiving benefits is likely to be limited. 

Can death benefits be paid to a charity? 

A charity lump sum death benefit can be paid out from a money purchase arrangement but only where there are no dependants of the individual. See more here.

They will need to nominate the charity on their nomination form.  

Can a Power of Attorney update a death benefit nomination for someone? 

The Attorney can change the nomination, but they will need to ensure this is something they are allowed to do under the power of attorney they have and, any decision they make on behalf of the individual (the ‘donor’), must be in the donor’s best interest. If necessary, they will need to seek legal advice.

Inheritance tax on pension death benefits from April 2027

The government announced it's intention to bring unused pension funds and death benefits within the value of an individual’s estate for inheritance tax purposes from 6 April 2027. This article looks at this further.

Disclaimer

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.