Why it pays to check a client’s pensions death benefit nominations
Using two case studies, Fiona Tait, technical director Intelligent Pensions, shows the importance of checking the client’s death benefit nominations are still appropriate
All wise married men know that ignoring their spouse is a very dangerous game, however there are some scenarios where it makes sense, and I recently came across two very different examples.
Case study 1: Husband and wife
In the first example our client had unfortunately passed away, leaving his wife as the sole nominee to receive his pension fund. His idea, naturally, was that she would take an income from it which would support her until her own death, a decision discussed and re-confirmed at the couple’s previous annual review. The trouble was that in the event she decided she didn’t want it. Although they had anticipated her continuing to travel and maintain the same sort of lifestyle that she had enjoyed while her husband was still alive, it turned out that she no longer had the wish to do this and preferred to live more quietly on the income she could obtain from her own pension and the remainder of her other inherited assets. As a result we were asked if she could give up the pension death benefits in favour of her two adult children.
This is certainly possible, however as neither child had been nominated as beneficiaries by their father the only option open to the trustees was to make a lump sum payment of the benefits to them.
Nice problem to have you might say. As their father had died before reaching age 75 they each stood to receive a nice tax-free lump to spend in any way they wanted. However, they did not want it, or at least not in that form. Neither child had any immediate need for income or capital and both wanted the ability to pass on this inheritance to their children without it being added to their own estates.
This could easily have been achieved using nominees’ Flexi-Access Drawdown (FAD). This was an available option on the plan and would have required the children to be nominees. It wouldn’t have taken much – just the inclusion in the Expression of Wish of a small proportion of the fund to be paid to his sons, with the majority still going to his wife. She could then have chosen not to take her share and the trustees could pay it to the children in any format they wished.
In the event the solution we recommended was that the benefits were paid to the spouse who then designated the plan to pay nominees Flexi-Access Drawdown. She then nominated each of her sons as her successors so that they would receive any remaining funds, but not until her own death.
Case study 2: Children involved
In the second case we had the opposite problem, though at least this time we were able to deal with the issue while the member was still alive. This client also wanted to give his pension fund to his wife in the event of his death, however he also wanted to stipulate that his children should receive it after her death, which he could not do without setting up an additional trust. Once the fund has been transferred to the spouse, who was nearing 55, she would soon be able to spend it and could nominate her own choice of beneficiaries of any death benefits.
This was not acceptable to the client. Although he loved his wife, she also had a family from a previous relationship and there was some discord between the two sets of step-siblings. Equally, while he wanted his children to benefit from his pension he did not want to cut his wife out entirely.
The solution in this case was a spousal bypass trust (SBT), whereby the member sets up and nominates a separate trust to receive the benefits on their death. This provides the opportunity for him to choose his own trustees and leave instructions as to how the trust property should be managed, including a direction to make payments to the spouse to meet her ongoing needs. These payments can be made from the SBT in the form of a loan which is repayable on her death, creating a debt on her estate and allowing the full value – subject to tax and investment performance – to be paid to the children at that point.
There is a tax consequence of this strategy as the receiving trust will be subject to a periodic tax charge, which is obviously more likely to impact if the spouse is fairly young. The initial payment will also be subject to a 45% tax charge if the member was over age 75 at the date of his death, however there is some relief since this may be offset against income tax in the hands of the eventual beneficiaries when the SBT is wound up.
Lastly it is essential, particularly in cases which may be contentious, that the member is able to appoint at least one disinterested trustee whom they have confidence will follow their wishes.
All of this shows the necessity of checking with clients every time the plan is reviewed, that the death benefit nominations are up to date and remain suitable to the family circumstances. Additionally, it is important that the spouse and potential beneficiaries are included in these discussions, and given a chance to voice their opinion. This can be very difficult in practice since – as in the first of these cases – the recipient spouse may feel they don’t have the right or the knowledge to offer a different opinion from the one who built up the pension fund in the first place.
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