When passing on death benefits, pension freedoms have brought in an element of legislative scope. However, in order to ensure death benefits are passed on in the way the client intended, it is important that the rules of their specific pension scheme are checked, as these are the ones which apply.
The implications of failing to examine the detail of a particular pension scheme can be illustrated in the following example:
Mr X wishes to ensure that upon his death, his wife would have access to the pension funds with the remainder being left to his children.
His main priority is to offer his loved ones the widest range of financial flexibility in regards to his remaining pension funds.
The adviser of Mr X informs him that an expression of wishes form should be completed for his scheme and advises the “98+1+1” method.
Under the pension freedom legislation, the “98+1+1” process should provide scheme trustees with the broadest range of choices for both the children as well as the spouse, who have been named on the expression of wishes document.
If Mr X’s pension scheme offered full discretion, the “98+1+1” method would mean trustees have lump sum and income payment options as well as being able to vary the amount that particular trustees receive.
Therefore, should Mr X die, his spouse would be paid 98% of the scheme benefits by the trustees and 1% each would pass to each of the children.
However, whilst the pension freedoms have widened the options in respect of the legislation, where distribution of the fund is concerned, the rules of the pension scheme concerned is the one which counts.
Due to the binding nature of the nominations made, if Mr X’s wife was to pass her benefit to the children, the payment would be counted as unauthorised and thus liable for punitive tax charges. The scheme would be unlikely to permit this and instead offer the 98% share to his spouse as either a lump sum of either dependent’s drawdown.
Thus, in the absence of checking the specific scheme details, the desired outcome for Mr X cannot be confirmed.
Had the adviser done this, he would have established the binding nature of the nomination and thus a lack of flexibility for distribution of death benefits. Instead, details should be given in the expression of wish form or under the scheme rules.
Mr X may then have been advised to draft his expression of wishes document to express that the trustees should contact his family in the event of his death. This would then enable his nominees to have the option to obtain the funds should they wish – initially his spouse, with the remainder passing directly to the children.
