Last week I looked at the rules for nominating beneficiaries’ flexi-access drawdown benefits under the pension freedoms regime. That nominees’ and successors’ drawdown is possible is good; that the rules are as they are in relation to who can receive these benefits is not so good.
The following example will hopefully explain how beneficiaries’ flexi-access drawdown income nominations work on the member’s death. Please note this will, of course, depend on the rules and practice of the pension scheme under consideration.
A scheme member dies leaving a widow and three (non-dependant) children A, B and C. A has two children (AA and AB), B has one child (BA) and C has two children (CA and CB).
The member fills in an expression of wish form stating he would like the following dispositions to be made from his pension scheme on his death: “Lump sums and/or income payments to his spouse and his adult children, A and C, and also to his grandchildren AA, AB and CA and CB. In addition, the member wants income or lump sum benefits to be paid to his secretary.”
When the member dies it comes to light he had a falling out with child B, which was why that child was not included in the expression of wish form along with their child BA. Clearly, there are nominees named by the member and also a dependant in the widow.
The widow and children A and C jointly ask the scheme administrator to make provision for both B and BA and to not give any benefits to the secretary. The widow also feels that she is well provided for and says she does not need any lump sums or income payments.
After careful consideration, and taking into account the expression of wish form and the facts of the case, the scheme administrator decides to:
- Offer A, AA, AB, C, CA and CB 12.5 per cent of the death benefits each. They can be given the choice of taking these as a lump sum or as income drawdown (as they were nominated by the member).
- Offer B and BA 12.5 per cent of the death benefits each. However, as they were not nominated by the member this can only be offered to them as a lump sum. Beneficiaries’ flexi-access drawdown is not an option as the scheme administrator cannot make a member nomination as there is a dependant of the member alive (and the member has nominated other individuals as beneficiaries).
- The scheme administrator decides not to offer any death benefits to the late member’s secretary as she was well provided for in other ways.
It is important to understand that, just because the member nominates an individual or individuals to receive beneficiaries’ flexi-access drawdown income, it does not mean the scheme administrator has to follow that nomination. The scheme administrator can always choose to pay lump sum death benefits to a member or members of the discretionary class expressed in the scheme rules, and not necessarily to the person(s) nominated by the member.
Increased flexibility can be provided by using an expression of wish form that enables a large number of individuals to be nominated for income and/or lump sum benefits with the final decision being made by the scheme administrator after consultation with the beneficiaries concerned. It seems some advisers are advocating incorporating in the expression of wish form, or in a separate (non-binding) side letter, a request that the scheme administrator should liaise with the family after the member’s death to determine who, from the list of nominees, should receive what and in what format.
Having an awareness of these (frankly unnecessarily prescriptive and arcane) rules is essential for advisers. It is hard to rationalise these conditions for how benefits can be taken and by whom, especially that of having to be nominated by a member (albeit in an expression of wish) if a beneficiary is to be capable of receiving the death benefits as beneficiaries’ flexi-access drawdown where there was a surviving dependant(s) of the member.
However, the rules are the rules so we have got to operate within them, at least for the time being.
Best practice in this unnecessarily complicated (but very important) part of the planning process should be for advisers to hardwire a review of the nomination/expression of wish into every annual review and following each key life event.
Although necessarily not binding, this will be a very important piece of guidance for scheme administrators and so should always reflect the member’s latest wishes.
Tony Wickenden is joint managing director of Technical Connection