Do you know what will happen to your pension when you die? Will it provide the benefits to your dependants you expect it to?
For many people their pension is one of their most significant assets. Despite this, the recent case of Samantha McConnell has highlighted that many people are not aware of what will happen to these benefits when they die.
Ms McConnell was a terminally ill mother-of-two who, until the Defence Secretary intervened, was told her Royal Air Force pension would cease on her death and not be paid to her children. This was because her children were born after she left the RAF.
The case highlights how important it is to understand what benefits are payable and who they can be paid to. The good news is that there are simple steps you can take now to ensure your loved ones are provided for in the future.
The benefits provided on your death will depend on the particular benefit structure of your pension scheme (is it a defined benefit or defined contribution arrangement?) and whether your pension arrangement is trust-based (that is, administered by a set of trustees on behalf of an employer) or contract-based (usually administered by an insurance company).
The benefits that might be payable following your death will fall into two categories: pensions and lump sums.
- A recent case involving a former RAF linguist highlights the problems of passing on your pension if you die
- Many DB schemes will pass on the pension to the deceased's spouse
- For DC schemes, the most likely death benefit is a lump sum
If you have a DB pension, the benefits payable on your death will depend on whether you die while still employed, after you have left employment (but before you retire), or when you are in retirement.
The class of potential beneficiaries of these benefits will vary from scheme to scheme and depend on the precise wording of the scheme’s governing documentation.
Many DB pension arrangements provide for a ‘spouse’s pension’ to be payable following the death of a member. However, pension schemes often define ‘spouse’ in different ways.
A spouse is usually defined as a ‘legal spouse’ – this is relatively straightforward.
However, there could be additional provisos such as a requirement that the spouse be resident with the member at the date of death or a restriction where the marriage occurred after the member has left employment or after the member’s pension starts.
One issue that has been clarified recently is the treatment of same-sex spouses and civil partners. As a matter of law, pension schemes are now required to treat same-sex spouses and civil partners in the same way as they would treat an opposite-sex spouse.
Some schemes, such as the Local Government Pension Scheme, provide for pensions to be payable to an unmarried, ‘common-law’ partner – or other financial dependants – if there is no legal spouse.
In most of these schemes, there will be some degree of discretion over whether to pay this benefit. In exercising this discretion, trustees and administrators will look for evidence of financial dependency/interdependency.