Pensions 

Will the Retirement Outcomes Review deal with death benefits?

Gareth James

Gareth James

The Retirement Outcomes Review is undoubtedly a huge Financial Conduct Authority initiative.  

It will bring about important changes to communications with pension scheme members around their retirement options; offer many the option of default investment pathways; and nudge others away from defaulting into cash.

The Review’s breadth is impressive, but has left me wondering whether an area which will be of growing importance in coming years is at risk of being neglected.

‘Income withdrawals’ is defined in the FCA’s glossary to include “after that person’s death, his surviving spouse, his surviving civil partner or anyone who is, at that time, his dependant, or both”. 

This means many of the FCA’s requirements in relation to individuals entering income withdrawal apply equally to death benefits as they do to ‘member benefits’.

This creates issues that need to be considered.

Starting with two relatively minor points:

  1. The definition does not properly reflect the post-April 2015 pension freedoms world. Pre-April 2015, in order for death benefits to be paid using income withdrawal, the recipient had to be the spouse, civil partner, or a dependant of the deceased (so as per the current FCA definition of income withdrawals). Non-dependants could only receive death benefits in the form of a lump sum, but not as a pension. This is no longer the position. Non-dependants can now receive death benefits via income withdrawal provided they are a ‘nominee’. The definition needs to be updated to reflect this.
  2. In publications, the FCA has referred to dependants ‘becoming the member’ after the member’s death. That is not how legislation works in many pension schemes. Dependants do not become the member and start to receive member benefits (which would normally mean they could only receive them from age 55). The dependant/nominee receives the benefits as a dependant/nominee, meaning there is no age 55 minimum requirement. Beneficiaries can receive income withdrawals at any age.

That final point raises the broader question of whether the FCA’s current, or proposed, rules regarding individuals entering drawdown are as appropriate as they might be for those receiving benefits as a spouse, dependant or nominee.

The rules are designed for situations where the person entering drawdown is over 55.

Younger nominees and dependants are potentially going to have completely different motivations and considerations when looking at their drawdown fund than someone taking their own benefits at 55 or above may have – these could include supplementing earnings, management of income tax, inter-generational planning or use of funds as a saving source in their own right, among many other possibilities.

Another important question is whether the point at which the funds are distributed to the beneficiary as income withdrawal, a point in time when the beneficiary is still likely to be grieving the loss of their spouse, civil partner or relative, is really the best time to be asking the beneficiary to go through a process involving risk questions, provision of risk warnings, the issuing of KFIs and many other considerations. 

There is a higher risk that the process will be seen as intrusive in these circumstances, with risk warnings and KFIs not being fully considered because of more important considerations.

Death benefits may be seen as a niche issue but over time will form a larger and larger proportion of the pension benefits that become available to individuals.

It would be concerning, given the circumstances most individuals will be in when they first receive those death benefits, if regulatory requirements were not tailored to be appropriate to the particular sensitivities of those circumstances.

Gareth James is head of technical resources at AJ Bell