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.
Another reason could be in relation to care. If a spouse received a dependant’s drawdown and then ended up in long term care then the drawdown would be considered by the local authority in the same way that the member’s drawdown would be. This would not happen if the money was in trust.
Death benefits are usually income tax free (but may be subject to the lifetime allowance tax charge) when paid to an individual or non-individual, if the current holder of the benefits is aged less than 75 and the benefits are paid within two years of the scheme administrator becoming aware of the death. Between 6 April 2015 and 5 April 2016, a SBT may not have been a good idea post-75 as lump sums were taxed at 45 per cent irrespective of the recipient.