Inheritance TaxJun 1 2018

Press pension schemes to check death benefits, advisers told

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Press pension schemes to check death benefits, advisers told

Advisers are being warned not be overly reliant on death benefits nominations, saying any pension scheme administrator adhering to their duty of care would double check a deceased’s family situation to ensure the benefits go to the right people.

Death benefits can be paid out in the form of a lump sum or in the form of a pension. But while lump sums can be paid to anyone, only certain types of beneficiary can receive a pension, these being ‘dependants’, ‘nominees’ and ‘successors’.

A nominee is a beneficiary who has been nominated by the client on a death benefit nomination

In February Royal London had warned more than 750,000 people could be passing their pension to the wrong person because they have not updated their nominations.

But Neil MacGillivray, head of technical support at self-invested personal pension (Sipp) provider James Hay, said duty of care rules state scheme administrators must check the deceased’s family for dependants who may have a right to the inheritance, as well as a person’s will.

Mr MacGillivray said: “Scheme administrators have a duty of care so they have to look at a nomination and get information about the beneficiaries, dependants, will.

“Sometimes that can be hard to get but as a provider you should do that as a matter of course.

“So that thing that you have nominated someone to whom (an administrator) will automatically pay out is nonsense.”

Nominations were also typically non-binding on trustees, unless a specific binding nomination was made, which can be tax inefficient, he added.

Also he said in his experience contended cases could go either way at the ombudsman, and sometimes no real weight is given to the nomination.

The Pensions Ombudsman has processed 116 death benefits cases since 2010, of which 64 were not upheld, 12 were partly upheld and 40 were upheld.

One case saw a man nominate himself as the beneficiary. When he died, AJ Bell paid out to his estate as per nomination but when his partner challenged the decision, the firm was asked by the ombudsman to reconsider due to her dependency on her deceased partner.

Agreeing that up to date nominations were important, however, Mr MacGillivray said about 95 per cent of James Hay’s death benefits cases were straightforward while the rest typically suffered from a lack of or outdated nominations.

Poorly drafted nominations were another factor he warned about.

For instance, Mr MacGillivray had come across a case where James Hay rejected a client’s nomination, which had contained an instruction to delay payments, but another administrator accepted the client’s wife’s one, which was identical.

He said: “They asked us to delay payments to their grandchildren until they were 21 but we can’t do that. We would have to pass it on to the guardian or parents to do that.

“But the other provider seemingly just rubber stamped it. Advisers should ensure they check their clients’ nominations.”

Alistair Cunningham, financial planning director at Wingate Financial Planning, said death benefit nominations were "essential".

He said: "Where possible most people should leave an inherited pension fund but many pension contracts do not offer this option.

"The reason nominations are not binding is to make sure they are not inheritance taxable."

carmen.reichman@ft.com