PensionsOct 31 2018

Passing on your pension benefits

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Passing on your pension benefits

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.

Many DB pension arrangements provide for a ‘spouse’s pension’ to be payable following the death of a member.

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. 

Key Points

  • 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.

Spouse’s pension

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.

Under some scheme rules, the pension payable to an unmarried partner can also be lower than that which would have been paid to a legal spouse.

Until recently, a member may have needed to nominate their unmarried partner to receive these benefits. If you are not married, you may wish to check if your partner is likely to be eligible to receive pension benefits following your death. 

Children’s pensions

Many DB pension schemes also provide for pensions to be payable to a member’s children following their death. As with the definition of a spouse, there are also different definitions of what will constitute a ‘child’.

Children’s pensions will only be payable until a child reaches a certain age – this is usually between 18 and 23, but will depend on the particular scheme rules.

The pension may be payable to a later age, but not later than 23, if the child is in full-time education. If you have adopted children, step-children or children born via IVF (as in the McConnell case), you may wish to check that they will fall within the definition of a ‘child’ for the purposes of any children’s pensions. 

It is also worth checking if children born after you leave employment are covered.

Lump sums

Many pension schemes pay lump sums following the death of a member. For trust-based DC schemes and contract-based schemes, a lump sum is likely to be the only benefit payable on your death.

The lump sum may be based on the size of your pension pot when you die or a multiple of your salary (or a combination of both).

These lump sums can usually be paid to a wide group of potential beneficiaries and are usually paid tax-free. They are paid at the discretion of the pension scheme’s trustees or the pension provider.

The scheme rules usually define the extent of the discretion to be exercised and the potential beneficiaries. 

Trustees and pension providers take into consideration your wishes when exercising their discretion if you have completed the relevant expression of wishes documentation. However, they do not necessarily have to follow your wishes.

If they have grounds to believe that any expression of your wishes is out of date and may have been superseded by changes in your circumstances, they may attach more weight to other relevant considerations such as your will.

It is therefore really important that your clients keep their expression of wishes forms up to date.

The requirements of different pension schemes for a valid nomination will vary. To ensure pension scheme trustees or providers are able to fully exercise their discretion, the information on the nomination form needs to be as detailed and clear as possible.

If the pension scheme trustees or providers are unable to identify the nominated beneficiaries, they will be unable to take the member’s wishes into consideration. If there is an up-to-date expression of wishes form on file, this will usually be followed unless there are strong reasons not to do so.

If the potential beneficiaries provided by the scheme rules are not available – for example, if the member had no surviving family members and had not made a nomination, or the nominee had predeceased the member – the trustees or provider will be unable to exercise their discretion and may have no choice other than to make payment to the member’s estate.

This will mean that the lump-sum benefit would be included in the member’s estate and may be subject to inheritance tax.

What should you do now?

If you are unclear what will happen to your pension when you die, there are some practical steps you can take now:

• Check the detail of your benefits in your scheme’s governing documentation – they will usually be summarised in the scheme booklet, which you should have received when you joined the scheme. Some schemes and pension providers also have a website. Booklets and websites are always a good starting point if you have concerns about any aspect of your pension benefits. 

• Contact your scheme administrator or pension provider if you still have questions or to raise any concerns.

• Make sure that any expression of wishes forms are up to date, particularly if your personal circumstances have recently changed. If you have more than one pension, you will need to complete a separate form for each one.

Nigel Cayless is associate director of Sackers