Will? Check. Life assurance? Check. Pension death benefit nomination? Check. That is good, everything seems to be in order. When I shuffle off this mortal coil, everything will be OK. Right?
My death benefit nomination under the civil service scheme is to my wife. She has been my wife for 31 years and there are no complications. I would expect the pension and death benefits to go to her, but I do not actually know this for certain. This is because they will be granted at the discretion of the trustees or administrators of the scheme.
When things get complicated, it can cause confusion. To illustrate the point, consider three scenarios based on real examples we have encountered recently. Things really do get this complicated but there is a single question that links them all.
Anne had previously been married to Barry, but was married to Chris when she passed away. Barry was still in business with Anne. Anne had completed a nomination in respect of Chris but then replaced it with a nomination for Barry.
Anne was also a bit lax with administration and the handling of property abroad that she jointly owned with Barry. The transfer to her and Chris had not been completed. Chris was not happy.
Barry claimed Anne had said she would change the nomination in his favour, but Barry had not believed she would. Anne would expect the death benefits to go to Barry as per the nomination.
Dave and Emma are siblings, and Dave and Frankie are married. But things are not going smoothly. Not only is Dave terminally ill, they have discovered Frankie has been investing in property without telling Dave.
This is a significant trust issue. There is no time to change the will, but just enough time to put in a nomination for death benefits in favour of Emma.
Gary died leaving three children from a previous marriage to Harry listed on the nomination form. They describe Gary’s relationship with Harry as ‘partners’.
A request for Harry’s contact details by the trustees is met with vitriol by the children. Harry and Gary had fallen out. Harry is beyond the pale and Gary would never in a million years have wanted anything to go to Harry.
Yet the death benefits are paid at the discretion of the scheme. The trustees have no choice but to contact Harry to see if there was any dependency. Gary’s children take exception to this because the will is very specific about what is left to them.
The common question in all these scenarios is why are the death benefits paid under discretion? The simple answer is they are pensions written under trust and all extra benefits are discretionary. It has been that way since just after the First World War, if not before. The trustee discretion ensures death benefits from registered pension schemes are not subject to inheritance tax (IHT).
The cost of this IHT benefit is just a bit of administration in the simple cases: you have to gather the information and consider it. But in cases such as those outlined previously, admin costs can quickly mount up. The real cost can be that payments end up going somewhere other than the beneficiary suggested on the nomination form or in the will.
This is a problem from another century, if not another age. Most new members of pensions are being auto-enrolled into personalised savings vehicles, not pooled vehicles where risk and rewards are shared.
But this could be changed by a simple clause in the Finance Bill that makes all pension death benefits free of IHT. Provider discretion could then be removed. The financial bill clause can have an anti-avoidance provision attached to it so if people increase pension savings to avoid IHT, the carve-out would not apply.
This will not cost anything because discretionary pension death benefits are not subject to IHT. It would, however, give people certainty that their pension death benefits will actually go to the people they put on the nomination form. It would also remove a whole load of angst for bereaved families and administration for product providers and advisers.
Peter Hopkins is technical resources director at AJ Bell