Clients cannot always rely on pension providers to follow their wishes when it comes to beneficiaries on death
Headlines earlier this year drew attention to a startling statistic that 750,000 people coming up to retirement are at risk of their pension being passed on to an ex-partner when they die because they have not updated their expression of wish.
Now, at the very outset of this article, I want to make clear I am not disputing the importance of keeping an expression of wish up to date.
This is important for two key reasons. First, it gives guidance to the pension provider as to whom the member wishes to benefit and, second, pension freedoms now allow for the option of the beneficiary to receive a pension rather than a lump sum.
The amount of money involved can be considerable and members should always be encouraged to review who they would like to benefit, particularly when their circumstances change. Many complete an expression of wish when they become a member of the scheme and never think to update it.
All of that said, to imply that a pension provider will act merely on the guidance provided through an expression of wish is reckless to say the least.
The majority of pension schemes give the scheme administrators/trustees discretion as to whom they pay death benefits to. It is a big responsibility and should not be taken lightly. For it to be effective to avoid inheritance tax, the pension provider must be able to demonstrate it has used its discretion.
Perhaps of more importance is that there is a duty of care on the administrators/trustees to consider who they should pay the benefits to.
As well as looking at the expression of wish, the provider should enquire about the terms of the deceased’s will, if one has been made, and obtain details of marriage status, children and other financial dependants. It is also not unrealistic to ask for evidence of financial dependency where the situation is uncertain.
Fortunately, in most circumstances it is fairly obvious who should benefit and a pension or lump sum can be paid quickly with no fuss or challenge. But there are always exceptions.
Tales of caution
For example, there was a case recently where the member had divorced. His ex-wife got the house and in return he got to keep his pension. He had been advised by his solicitor to change his expression of wish and he duly did so, nominating his two sons.
A couple of years later, he entered into a new relationship and had another son. Unfortunately, he died in an accident and had little assets other than his pension. His ex-wife was not financially dependent on him and his sons from his marriage were in their late teens at the time of his death.
Though his ex-wife vigorously fought to have all the pension proceeds paid to her sons, the decision was to pay a large proportion to the partner and the remainder split between his three sons.
In a similar scenario, but with a different outcome, the member had remarried but had a daughter from his first marriage. He had nominated his daughter in his expression of wish and this had been dated prior to his second marriage.
On his death, his widow claimed the death benefits should be paid to her in full and her late husband had merely forgotten to update the expression of wish. However, on investigation it became clear it had always been his intention for his daughter to benefit from his pension and he had made other provisions for his wife.
If the member had completed a new expression of wish after his second marriage, keeping his daughter as potential beneficiary, it would have sped up the process but not changed the outcome.
There is no doubt that an up to date expression of wish can make life easier in the decision-making process – but only as part of the equation. The need to demonstrate a duty of care, the requirement for investigation and using a bit of common sense is every bit as important.
Neil MacGillivray is head of technical support at James Hay