Articles - Death benefit issues

I’ve been talking a lot about death this week. Not the most joyous of subjects, but one where simple actions can make a big difference to the lives of those who are left.We have never had a better opportunity to pass on any unused pension funds than under the current rules for Defined Contribution (DC) pensions.

 By Fiona Tait, Technical Director, Intelligent Pensions

 People who might otherwise resent making contributions which they may never benefit from are somewhat reconciled by the notion that at least they can ensure someone they love will get it and not the taxman.

 The problem is that too many people assume that just because the law allows a particular course of action that their family or friends will automatically be able to benefit. I came across 3 cases this week, each of which illustrated what can go wrong if plans are not regularly reviewed. In each case the death benefits had been left to the spouse.

 Check the scheme rules
 In the first case the client, who had a DC pension, nominated his spouse to receive the benefits on his death. The spouse in question did not want to use all the benefits and intended to use drawdown to preserve the value of the fund so that it could be passed on to her children outside of her estate. The problem was that the scheme did not actually offer drawdown.

 I have recently purchased an extremely handy cordless vacuum cleaner made by the same manufacturer as my last one, which makes sense to them because this is obviously the future. I do not however expect that my old vacuum cleaner will suddenly operate without a mains attachment, or that the manufacturer should be obliged to upgrade it. If I want this nice new feature I need to get a new machine.

 The same goes for pensions. Drawdown has been available since 1995 however there is no obligation for any provider or any scheme to offer it. If they were to do so they would need to upgrade their systems to manage an option that did not exist when the product was first designed and built. This is particularly true for Flexi-Access Drawdown (FAD), dependents’ and nominees’ FAD.

 These options require that the scheme can pay out different amounts at any time the policyholder wants it, and with the right deductions for tax where applicable. The existing systems just don’t have the functionality. So, if you believe your clients or their beneficiaries would benefit being able to withdraw money directly from the fund without bringing it into their estate you have to check that the scheme rules allow it.

 Check the nomination form is up to date.
 The second case involved a relatively new client who had two pension plans, naturally our analyst took all his assets into consideration. We knew he was married with two young children, and during the review process he mentioned his ex-wife of 10 years’ ago. Our analyst immediately thought to ask if he had updated his expression of wish (EoW) form on his old plan, he hadn’t.

 Not only would the benefits have gone to his ex-wife in the event of his death, but his children would have received nothing unless a case was put to the trustees to ignore the EoW. This would have been possible, and it is likely the trustees would consider it if asked, but it is much easier to simply fill out a new form and avoid all the potential hassle.

 Check everyone is eligible to receive the benefits you want them to have
 The third case was also about drawdown. The client had a substantial pension fund in his SIPP when he passed away, with his wife as the sole beneficiary on his EoW. She did not need the capital, and neither did his two sons, all of whom had substantial assets of their own.

 The plan had always been that if the spouse didn’t need the pension funds she would give up her rights in favour of their children or grandchildren. This was possible, but similarly to the first case, the member assumed that after pension freedoms their sons would be able to use FAD. Their plan did in fact allow nominees’ FAD for non-dependent beneficiaries, the problem here was that neither of the sons were in fact nominees because the member hadn’t included that in the EoW. Not being nominees, the sons were only permitted to receive the benefits in the form of the lump sum they didn’t want, rather than the income that they did.

 Three different issues, each of which could have been prevented by very little work and a good attention to detail.


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