It is essential that clients are aware of how the law works. If a member has a separated spouse and two adult children but dies without an expression of wishes, then the provider will be restricted as to how benefits can be offered. Evidence could be received that they would not want the separated spouse to receive any benefit but would instead want their children to benefit. However, as the separated spouse is technically a dependant and the children are not, the children can only receive a lump sum which may not be the most tax-efficient option. Make sure that clients understand that any non-dependants should be named on the expression of wish form.
Bloodline or family plan?
The recipient(s) of death benefits are usually chosen at the discretion of the pension scheme trustees or administrator. However, a member can nominate whom they wish to receive the benefits, by completing an "expression of wishes" form and the trustees will usually take this into account.
It is important to note that when the funds pass to beneficiaries, following the death of the member, the funds then follow the beneficiary’s choice of subsequent successor. So the original member has no control over the remaining funds and the choice for later payments after their subsequent death.
As such, if the funds initially pass to a spouse, the spouse could subsequently leave the money to the children of a later relationship (rather than the children of the original member) so benefits can quickly leave the bloodline.
The only way for the original member to retain a degree of control is to express a wish that the benefits are placed in trust. A commonly used trust to facilitate this control is a spousal bypass trust (SBT).
Spousal bypass trust
If the family situation is more complex then it could be worth expressing a wish that the SBT receives the lump sum death benefit to make sure that the money stays within the bloodline. The member may also think that a beneficiary should not be given the option of taking a cash lump sum and instead receive a regular income to be paid. Perhaps the member does not want their 18-year-old child or grandchild receiving a large amount of cash.
The member may want an adult child to benefit but they are concerned that the intended recipient’s marriage is rocky and that if a divorce happened then any lump sum or drawdown could be considered matrimonial property.
