By Fiona Tait, Technical Director, Intelligent Pensions
The key to this is the client’s Expression of Wish (EoW). In most cases the responsibility for paying out benefits lies with the trustees of the scheme under their powers of discretionary disposal. If this power is overridden and the member provides an explicit direction of where to pay benefits those benefits will be treated as part of their estate and may be subject to inheritance tax (IHT).
So, while it is extremely helpful for trustees to know what the member’s preferences are, this instruction must fall short of a binding instruction.
The result is that:
1. The trustees need an EoW to tell them what the member’s wishes are to give them the best chance of making the ‘right’ decision, however
2. The trustees are not obliged to follow the client’s wishes, and even when they do the decision may be challenged.
In the majority of cases these conditions do not create a problem. Where the only people in play are obvious beneficiaries such as a legal spouse and/or biological children, then it is highly unlikely that the trustees would deviate from the member’s wishes. Problems are more likely to occur when the client’s family circumstances are complicated and there are family or friends who feel they have been unfairly overlooked.
In the case of Rushin v The Aviva Staff Pension Scheme when the member had not filled out an EoW and the trustees made the decision to pay death benefits to his partner. This decision was challenged by the member’s parents as the couple were not married, and because she was also receiving income from a previous partner. When the case went to the Pensions Ombudsman (PO) the trustees defended their decision on the grounds that the couple were financially mutually dependent, and their position was upheld. Ultimately the member’s partner got her pension but it took a lot of time and effort – not to mention upset – before this happened.
Mr E, a member of the Michelin staff pension scheme did fill out an EoW but failed to update it when he remarried. The trustees followed the EoW which asked for benefits to be paid to his 4 daughters but did not mention his wife. Their view was that the client may still have wanted this to be the case, however the PO held that the trustees should not have tried to ‘second guess’ the member’s wishes and should have looked at the wider position. Mrs E did receive her pension, but also not without difficulty.
The above problems could have been solved with some simple financial planning. It would have taken very little time for Mr Rushin and Mr E to fill out an EoW and for Mr E to keep it updated after that. Financial advisers and trustees can also help by doing more than just reminding members to update their forms but having regular conversations about the value of doing so. This is particularly important where there has been a major life event, such as a marriage, divorce or death in the family. In these circumstances the member should be reminded to review their current EoW and if they don’t want to change it, it would be good practice to record this on file so that the trustees have evidence of the member’s intentions.
Another option is for the member to consider setting up another discretionary trust and nominating it in the EoW. Disposal is still discretionary, as it must be if they are to remain outside of the estate, however the difference is that the people making the decision about who to pay, are people the member trusts and who know and understand the family dynamics.
A second trust also helps if there is good reason to delay the eventual payment of benefits, for example if the main beneficiary is incapable of managing their financial affairs or wishes to avoid the benefits becoming part of their own estate.
The downside of this option is that any payment made into the trust on death after age 75 would be subject to a 45% tax charge, which is of course higher than would be paid by a basic or even higher rate taxpayer. It does come with a tax credit though so the eventual beneficiaries would be able to reclaim some of it and of course it can be very helpful to have in place prior to the member reaching age 75.
In summary it is impossible to have both tax-efficiency and ultimate control of the payment of death benefits, however for the majority it only takes a few minutes to be fairly certain that their wishes will be carried out once they are gone.
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