Benjamin Franklin famously said that in this world, nothing is certain but death and taxes. Trustees of pension schemes and death in service trusts frequently find themselves dealing with both – often at the same time.
When a member dies, trustees need to check whether a lump sum death benefit is payable and, if so, who should receive it. They must move quickly, but take care to act reasonably. Getting it wrong can lead to disputes with potential beneficiaries, as well as negative tax treatment. We’ve laid out four simple steps to help trustees take decisions with confidence.
1. Check scheme rules
The first step is to check the scheme’s rules. Is a lump sum death benefit payable? What is the scope of the trustees’ discretion? What classes of person are eligible to be considered? Are there any time limits or other restrictions on payment of death benefits? Do the current rules apply, or are previous sets of rules relevant? If there is any question over how a scheme’s rules should be interpreted in a particular case, seek advice.
2. Make proper enquiries
Once the trustees have determined which categories of person are eligible to receive a lump death benefit, they must make enquiries to find out which individuals fall into these categories. There is no hard and fast rule for who trustees should approach for information, but the list might look something like this:
- The person who notified the trustees of the member’s death.
- The next of kin, if different.
- The executor of their estate, if different.
- The solicitor appointed by the member or their family.
- The member’s family, friends, work colleagues, or even the trustees themselves.
Typically, trustees will want to gather the following information as a minimum, depending on the member’s circumstances:
- nomination form/expression of wishes;
- details of the member’s will;
- death certificate;
- marriage certificate or proof of civil partnership;
- divorce decree or proof of dissolution of civil partnership;
- birth certificate for spouse, children or other dependants;
- evidence of financial or other dependency; and
- details of the member’s family and personal circumstances from trustworthy sources.
The definition of eligible beneficiaries in a set of scheme rules can be very broad, covering a wide range of people. Trustees aren’t obliged to make an exhaustive list of all possible beneficiaries within a class, or all possible classes of beneficiaries. However, they are under a duty to gather enough information and evidence to allow them to assess the position and gain a clear picture of the member’s circumstances.
3. Consider the information gathered
Members might think that by completing an expression of wish form, they can choose who will receive a lump sum in the event of their death. In reality, while trustees will certainly take this into account, it is only a snapshot of the member’s wishes at a point in time. Trustees need to consider the wider picture, including any change in circumstances since the form was completed.
Similarly, a member’s will is not binding on trustees. It may help guide trustees in exercising their discretion, but equally trustees may choose to distribute a lump sum in an entirely different way.
Trustees should assess the needs of each potential beneficiary – financial, educational or personal. Were they financially dependent on the member? Were they dependent for other needs due to their age or disability?
Where there is a complex family situation, trustees must take extra care to establish and understand the full facts. They may need to consider information from a number of different sources and use their judgement to determine which information is the most reliable.
4. Exercise discretion
Once trustees have checked the rules, gathered information about the member’s circumstances and considered all the evidence, it’s time to reach a decision. In doing so, trustees must act reasonably, take account of all the relevant circumstances, and beware a number of potential pitfalls:
- Delegation: some trustee boards choose to delegate death benefit decisions to a committee. If this applies, care must be taken to ensure there is a delegation power under the scheme rules and it has been properly exercised.
- Conflicts of interest: if a trustee knows the member or any potential beneficiaries personally, they should consider whether they can act impartially. In most cases, the safest route would be for a trustee with any personal involvement to abstain from taking part in the decision.
- Irrelevant factors: trustees must set aside their own political, religious or moral views or biases.
- Record keeping: decisions should be fully recorded, including the reasons for the decision and the factors that influenced the trustees (and those that didn’t). While there is no trust law duty to give reasons for a decision, the Pensions Ombudsman places a higher burden on trustees to explain their decision-making process to complainants.
- Timing: some scheme rules place a hard two-year limit on payment of death benefits. Other rules are silent, but taking longer than two years can have negative tax consequences for death benefits paid since 2016. Trustees should act quickly in relation to death cases or run the risk of complaints from beneficiaries. If they are nearing the end of the two-year period, or have exceeded it, they should seek advice.
If in doubt…
There are countless Pensions Ombudsman complaints on record relating to improper or incorrect exercise of discretion to pay lump sum death benefits. It’s an area where trustees must exercise judgement, often in complex circumstances, and make decisions that can dramatically affect people’s financial future. If trustees are in any doubt about their scheme’s rules, or how to exercise their discretion in a particular case, they should seek advice.
This material is for general information only and does not constitute legal advice. Professional advice appropriate to a specific situation should always be sought. Please contact our team for further information.