Due to the transient nature of the modern workforce, people increasingly move from job to job during their working lives, typically accruing a pension entitlement of some sort with each employment.
These pension schemes are designed to provide the employee with an income in retirement. However, life being what it is – and sometimes isn’t – there are few certainties other than death and taxes. And even the timing of these is not set in stone.
Part of any financial, tax, and estate planning process, therefore, must involve consideration of a scenario in which the individual in question dies before his or her pension is taken.
The challenge for financial advisers is that there are myriad types of pension schemes, each of which has its own rules as to how how pre-retirement death benefits are to be paid, and to whom. For the purpose of this article, therefore, we will consider UK pension schemes only, and expats with deferred pension benefits. Deferred benefits, in this case, being pension benefits that are, as yet, not being taken as income.
Pension trustees’ role
The first thing to understand is that the trustees of a UK pension normally will be given discretionary powers under the scheme rules, which permit them to distribute a pension scheme member’s death benefits, should he or she die before beginning to take them.
It is, of course, always prudent for the scheme member’s adviser to check the details of this clause specifically, in advance of a situation arising in which it might come into play.
In many cases, the beneficiaries of these death benefits will be clear. Usually, they are the surviving spouse, and/or any children.
But there are situations in which the situation is not so clear-cut. What’s more, it might be advisable to ascertain whether the pension trustees know precisely how the pension scheme member would have wanted the funds distributed, in the event of an early death, before a situation arises in which he or she is no longer around to ask.
For, if the trustees have not been given some direction by the member during his/her lifetime, there is a danger that the distribution will not be in accordance with the late pension scheme member’s wishes.
This is likely to be further complicated if the deceased member is not resident in the UK at the time of death.
Still further potential complications may exist. Consider, for example, the issues facing trustees in cases in which the pension scheme member has had a divorce and a remarriage, with the result that there are children from both marriages who are living in different countries from him or her, and from one another.
Expressions of wishes
An “expression of wishes” is just that, it is a document that lets the trustees know who a pension scheme member has nominated to receive any possible future death benefits. A pension scheme member can contact all the previous pension trustees and ask for a “death benefit nomination form”, if the scheme administrators have one. Generally, these are standardised documents drawn up by the pensionl trustees.
If they don’t have one, the nomination could be made by the member to the trustees by way of a personal letter. Such a letter must be clear, and leave the trustees in no doubt as to the wishes of a member.
In such cases it is always a good idea to ask the trustees to confirm, in writing, that they have received the nomination, so that this can be passed to the member’s legal representative.
A nomination provides an indication of the member’s wishes, at the time the nomination was made. The scheme administrator can then consider the nomination when exercising their discretion under the terms of the scheme rules.
It’s important that these nominations be kept under review and updated over time, particularly when the scheme member in question divorces, remarries, has children, or, for whatever reason, changes his or her mind about a particular beneficiary.
All such nominations must be provided during the member’s lifetime, as it is possible and often probable that the trustees will not consider a post-death nomination that originates from the scheme member’s family, or the scheme member’s family’s lawyers.
It is important to note as well that this nomination is not a part of the pension trust arrangement, and is also not binding on the scheme administrator – in order to ensure that all payments are made outside of the deceased’s estate, for Inheritance Tax purposes.
This is because, at the end of the day, a “nomination” is nothing more than an expression of wish – it is not binding, and does not have to be followed.
On the other hand, even a non-binding nomination is obviously going to be highly influential, particularly if one is not there to specify who else should receive the benefits from the pension trust arrangements. An individual’s accumulated pension cannot simply remain under the management of the trustees indefinitely after his or her death: it needs to be paid out.
That said, it is important to note that a pension fund’s trustees have a legal obligation to look at all the potential beneficiaries within the specific scheme’s rules, at the same time that they are considering the scheme member’s expression of wishes.
As for the nominations for the death benefits themselves, these can be made for specific individuals, or they can be made to a specified class of beneficiaries, or even, to a pre-existing trust.
The nature of a trust interest may provide, say, that certain persons have the right to income for life, with the residue to pass to other persons on their death.
Open questions
It’s a big and important area. But if you are an expat, or in the business of advising one, and you or your client has pensions in the UK, answering all of the following basic questions will get you much of the way dealing with this important issue.
1. Have you provided the pension’s trustees with:
• your up to date address ?
• your new surname, if you or your client is/are a woman, who has recently married or remarried?
• an up-to-date valuation, or annual statement?
2. Have you asked the pension fund’s trustees for a death benefit nomination form?
3. If you or your client is/are no longer resident in the UK, is there a place where the pension beneficiary’s family and legal executors can easily obtain details of the pension scheme’s arrangements?
A little time and money spent on answering these basic questions could ensure that the money from a pension scheme of an individual who dies unexpectedly while living abroad ends up in the right hands, and at the right time.
Based in the Czech Republic, Chris Lean is a UK-trained, independent financial consultant who specialises in IHT matters, trusts and holistic financial planning. Howard Chapman is a freelance solicitor (England & Wales) and registered European advocate (Czech Republic) at HJChapman, who has been living and practising in Prague since 2004. He is also the legal director for Belisarius Translations.
