Be careful what you 'wish' for...

The Exchange


The information contained in this page is for professional Financial Adviser use only.

I often ask people whether they would walk up to a stranger in the street, give them a very significant amount of money, and ask them to look after their family – having never met them and with no knowledge of the family circumstances. As you would imagine the answer is a resounding no. However, this can be an effective analogy for death benefits from the clients pension scheme if they have left no direction to help the trustees decide who should benefit if death occurs.

The introduction of the current pension death benefit rules in April 2015 has led to a significant change in the way these funds can be left, very tax efficiently, and used as an inter-generational source of income. The fact that the benefits can be left to a wider class of people than the old “dependants”, and can be in lump sum or a regular income form, introduces both flexibility and complexity.

Some of the regular problems for the trustees on the death of the member is that no direction, usually in the form of an “Expression of Wish” (EoW), exists. Often when it does it was completed at the commencement of the pension plan and has never been updated. Even if it has been updated recently it can often conflict with the terms of the deceased’s will and the spouse/beneficiaries may have a different view as well! At a time in life that I refer to as the most volatile cocktail in families – death, money and family, making sure the members actual wishes are clear and consistent is critical. Both for the scheme trustees and the actual and potential beneficiaries of the death benefits.

Where scheme members now update the EoW there is a real desire to try and cover all possible scenarios. It must be remembered that the scheme administrator has to have discretion as to who they pay benefits out to. If the wording on an EoW form is too prescriptive or detailed, it could be argued that there is no discretion involved. This could cause inheritance tax problems if HMRC see the direction as irrevocable.

Care is needed if, for example, a nominated spouse decides they don't want the benefits and asks for them to be passed to the children. This is because the payment has to be at the trustee's discretion not the surviving spouses. HMRC could also argue that the spouse has surrendered their rights, therefore creating an unauthorised payment.

HMRC have been specifically asked if taking instructions from a beneficiary is part of the discretionary decision making process or if it falls foul of Section 172A (as summarised in PTM133300). Unfortunately their answer was that the provisions of PTM133300 would apply.

What HMRC is essentially saying is that if a beneficiary is contacted with a view to making payment of pension death benefits and they request trustees not to pay them the full amount, there is potential for that person to be charged with having surrendered pension benefits, therefore creating an unauthorised payment charge.

This area of financial planning has changed significantly and this article has focused on a series of issues. Next month I will look at some of the potential solutions to these problems. As a rule death benefits should be addressed at least annually as part of the normal client review process to ensure they are relevant, clear and consistent. Making sure all parties know what the member wishes to happen can avoid delays in payment and misunderstandings that can lead to awkward situations for those left behind.

The information contained in this page is for professional Financial Adviser use only. If you are a private investor, please visit the Private Investor section or contact your Financial Adviser for more information.

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